Absorption and marginal costing

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Production costs incurred in the manufacture of 2,400 units of a product in a period are:
$
Direct costs 19,680
Variable overheads 3,120
Fixed overheads 14,640
What would be the expected total cost of manufacturing 2,300 units of the product in a period?
A $35,880 B $36,490 C $36,620 D $37,310

3. A company has over absorbed fixed production overheads for the period by £8,000. The fixed production overhead
absorption rate was £4 per unit and is based on the normal level of activity of 6,000 units. Actual production was 6,500 units.
What was the actual fixed production overheads incurred for the period?
____18,000__________

4. A company uses an overhead absorption rate of $3.50 per unit, based on 32,000 budgeted production for the period.
During the same period the actual total overhead expenditure was 10% higher than budgeted and actual production was 4%
higher than budget.
By how much was the total overhead under or over absorbed for the period?
£______6720 U________ (under / over)

5. Consider the following two statements

Statement 1: Under / over absorption is calculated to adjust difference between actual and absorbed fixed production
overheads
Statement 2: Profit under absorption and marginal costing might be different due to change in inventory level.
Are the statements TRUE or FALSE?
Statement 1 Statement 2
A. True False
B. False True
C. True True
D. False False

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7. A business uses absorption costing.
Which cost is used to value finished stock?
A full production cost B prime cost
C variable cost of production D variable cost of sales

8. Which of the following may result in an under-absorption of fixed overhead?

A absorption based on actual expenditure and actual activity
B activity above budget
C activity below budget
D expenditure below budget

9. Production overhead expenditure in a period totalled $102 660 compared with a budget of $105,270.
Direct labour hours are used to absorb production overheads. 8700 direct labour hours were worked in the period and
production overhead was over-absorbed by $1740.
What was the production overhead absorption rate per direct labour hour?
A $11.60 B $11.80 C $12.00 D $12.10

10. Cost and selling price details for product Z are as follows.
$ per unit
Direct materials 6.00
Direct labour 7.50
Variable overhead 2.50
Fixed overhead absorption rate 5.00
21.00
Profit 9.00
Selling price 30.00
Budgeted production for the month was 5,000 units although the company managed to produce 5,800 units, selling 5,200 of
them and incurring fixed overhead costs of $27,400.
 The marginal costing profit for the month is:______45,400__________
 The absorption costing profit for the month is:_______48,400________

11. A business provides the following data for the year.

budgeted output (units) 10 000
actual output (units) 8 000
$
budgeted fixed production costs 1 200 000
budgeted variable production costs 800 000
budgeted fixed selling overhead 600 000
What is the absorption cost per unit used for stocktaking?
A $200 B $250 C $260 D $325

12. A business has the following budgeted and actual results for a period.
$
budgeted fixed overheads 354 000
budgeted number of units 118 000
actual fixed overheads 360 000
under absorption of overheads 3 000
The fixed overheads are absorbed per unit.
What is the actual level of activity in units?
A 118 000 B 119 000 C 120 000 D 121 000

13. In a period, a company had opening inventory of 31,000 units and closing inventory of 34,000 units. Profits based on
marginal costing were $850,500 and on absorption costing were $955,500. If the budgeted total fixed costs for the company
was $1,837,500, what was the budgeted level of activity in units? ____52500________

14. What could cause an over-absorption of overhead expenditure? (Tick all correct options)
1. Units produced exceeding the budgeted production
2. Units produced being less than the budgeted production
3. Overhead expenditure being less than budget
4. Overhead expenditure exceeding budget

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15. What will result in under-absorption of fixed production overhead?
A absorption based on actual expenditure and actual activity
B actual expenditure below budget expenditure
C actual activity above budget activity
D actual activity below budget and expenditure as budgeted

16. A company manufactures and sells a single product. For this month the budgeted fixed production overheads are
$48,000, budgeted production is 12,000 units and budgeted sales are 11,720 units. The company currently uses absorption
costing.
If the company used marginal costing principles instead of absorption costing for this month, what would be the effect on the
budgeted profit?
A $1,120 higher B $1,120 lower C $3,920 higher D $3,920 lower

18. Which of the following is not a product cost?

A. Depreciation on a raw materials warehouse
B. An employee working directly on assembling a car
C. The leather seats of a motorcycle
D. The real estate tax of the showroom

19. The table contains information provided by a company.

Budgeted direct labour hours 8 000
Actual direct labour hours worked 7 500
Budgeted overhead expenditure $104 000
Actual overhead expenditure $112 500
What is the amount of the overhead over / under recovery?
A $7500 under-recovered B $8500 over-recovered
C $8500 under-recovered D $15 000 under-recovered

20. Last month a manufacturing company’s profit was $2,000, calculated using absorption costing principles. If marginal
costing principles has been used, a loss of $3,000 would have occurred. The company’s fixed production cost is $2 per unit.
Sales last month were 10,000 units.
What was last month’s production (in units)?
A 7,500 B 9,500 C 10,500 D 12,500

21. A company recorded the following costs in October for Product X:

$
Direct materials 20,000
Direct labour 16,300
Variable production overhead 14,700
Fixed production overhead 19,750
Variable selling costs 4,500
Fixed distribution costs 16,800
During October 5,000 units of Product X were produced but only 3,600 units were sold. At the beginning of October there
was no inventory.
The value of the inventory of Product X at the end of October using Absorption costing was:
________19810______
.
22. A company uses an absorption costing system. 10,000 units of product were manufactured in a period during which
9,760 units were sold.
If marginal costing is applied instead what would be the effect on profit?
A Higher by (240 units x fixed production overhead cost per unit)
B Lower by (240 units x fixed production overhead cost per unit)
C Higher by [240 units x (fixed production overhead cost per unit + fixed non-production overhead cost per unit)]
D Lower by [240 units x (fixed production overhead cost per unit + fixed non-production overhead cost per unit)]

23. X Ltd currently uses marginal costing to calculate profit. There were 10,000 units of opening stock and 12,000 units of
closing stock for the period. If absorption costing principles had been used and the fixed overhead absorption rate was £30
per unit, the absorption costing profit for the period compared to the marginal costing profit would have been
_____60,000___________ [higher / lower]

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24. The table contains information provided by a business.
actual direct labour hours worked 18 000
actual overhead expenditure $504 000
budgeted direct labour hours 17 000
budgeted overhead expenditure $510 000
What is the amount of the overhead over / under recovery?
A $6000 over-recovered B $6000 under-recovered
C $30 000 over-recovered D $36 000 over-recovered

25. The table shows figures for a week’s production.

expected production 10,000 units
expected production overhead $50,000
actual production overhead $60,000
under-absorption of overhead $5,000
What is the actual amount of production in the week?
A 9000 units B 9167 units C 11 000 units D 13 000 units

26. The overhead absorption rate for product T is $4 per machine hour. Each unit of T requires 3 machine hours.
Inventories of product T last period were:
• Units
• Opening inventory 2,400
• Closing inventory 2,700
Compared with the marginal costing profit for the period, the absorption costing profit for product T will be:
• A $1,200 higher B $3,600 higher
• C $1,200 lower D $3,600 lower

28. What will cause under-absorption of fixed production overheads?

A absorption of overheads is based on actual expenditure and actual activity
B actual expenditure of overheads is below budget expenditure
C actual activity is above budgeted activity
D actual activity is below budgeted activity and actual expenditure is as budgeted

29. In a period, a company had opening inventory of 31,000 units and closing inventory of 34,000 units. Profits based on
marginal costing were $850,500 and on absorption costing were $955,500.
If the budgeted total fixed costs for the company was $1,837,500, what was the budgeted level of activity in units?
A 32,500 C 65,000
B 52,500 D 105,000

30. A company had opening inventory of 48,500 units and closing inventory of 45,500 units. Profits based on marginal
costing were $315,250 and on absorption costing were $288,250. What is the fixed overhead absorption rate per unit?
A $5.94 C $6.50
B $6.34 D $9.00

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5. A company manufactures and sells a single product. In two consecutive months the
following levels of production and sales (in units) occurred:
Month 1 Month 2
Sales 3,800 4,400
Production 3,900 4,200
The opening inventory for Month 1 was 400 units. Profits or losses have been calculated for
each month using both absorption and marginal costing principles.
Which of the following combination of profits and losses for the two months is
consistent with the above data?

32. Tan Products Ltd makes one highly desirable fashion item, the Croissant handbag. The following cost information is
available.
Per handbag ($)
Selling price 600
Direct materials (leather, thread, fastenings, linings) 100
Direct labour 75
Direct expenses 40
Workroom expenses – fixed 10
Workroom expenses – variable 15
Administration costs – fixed 20
Administration costs – variable 30
Answer the following
 What is manufacturing cost per bag? £240
 What is variable manufacturing cost per bag? £230
 What is variable cost per bag? £260
 What is contribution margin per bag? £340
 What is gross profit per bag? £360

33. 6 meter fabric of is expected to consume in manufacturing of one unit of Shirt. Labour is expected to consume 3 hours.
Price of fabric is £10 per kg and wage rate of labour is £6 per hour. Variable production overheads are expected to be £3.2
per labour hour and Fixed overhead absorption rate is £4.7 per hour. Fixed selling overheads are £10 per unit and variable
selling overheads is £2.5 per unit
If company is using absorption costing, at what cost it should value one unit of Chair ____117.6________

34. Total budgeted contribution of coming month is expected to be £300,000 from production and sale of 15,000 units. Fixed
overheads absorption rate is £10 per unit. There were no variable selling overheads.
If company uses absorption costing, then gross profit per unit will be £____150,000______

35. Total budgeted contribution of coming month is expected to be £300,000 from production and sale of 15,000 units. Fixed
overheads absorption rate is £10 per unit. Variable selling overheads are expected to be £2 per unit. Selling price is £60 per
unit
If company uses absorption costing, then stock will be valued at £____12______

36. A company uses absorption costing with a predetermined hourly fixed overhead absorption rate. The following situations
arose last month:
(i) Actual overhead expenditure was less than the planned expenditure. O
(ii) Actual hours worked exceeded planned hours. O Which statement is correct?
A Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be over absorbed.
B Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be under absorbed.
C Both situations would cause overheads to be over absorbed.
D Both situations would cause overheads to be under absorbed.