FA1334 Management Accounting

TUTORIAL 8: MARGINAL COSTING AND ABSORPTION COSTING

Question 1
A company has the following costs for its single product, based on planned production and
sales of 46,000 litres in a period:
RM per litre
Prime costs 5.20
Production overheads (fixed) 2.80
Non – production overheads
- Variable 0.65
- Fixed 1.70
10.35

Actual production and sales in the period were:

Production 46,000 litres
Sales 45,600 litres (at RM12.00 per litre)

There was no finished stock at the beginning of the period. Variable cost per litre and total
fixed costs in the period were as planned. Variable non-production overheads vary in total with
the number of litres sold.

Required:
(a) Prepare a profit statement for the period using absorption costing.
(b) Prepare a profit statement for the period using marginal costing.

Answer
(W1) Quantity
Litres
Opening stock 0
(+) Production 46,000
(-) Sales (45,600)
Closing stock 400

(W2) Variable production cost per unit

RM
Prime cost 5.20

(W3) Fixed production overheads per unit = Fixed production overhead

Normal quantity
RM2.80 = Fixed Production overhead
46,000 litres
Fixed production overhead = 46,000 × RM2.80 = RM128,800

(W4) Cost per unit

Marginal Costing Absorption Costing
(RM) (RM)
Variable production cost per unit 5.20 5.20
Fixed production overheads per unit - 2.80
5.20 8
(W5) Over/(Under) absorbed fixed production overheads

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RM
Fixed overheads absorbed (RM2.80 × 46,000) 128,800
(-) Fixed production overheads (128,800)
Over/(Under) absorbed 0

(a) Profit Statement (Absorption Costing)

RM RM
Sales (RM12 × 45,600) 547,200
(-) Cost of sales
Opening stock (RM8 × 0) 0
Production cost (RM8 × 46,000) 368,000
(-) Closing stock (RM8 × 400) (3,200) (364,800)
Unadjusted gross profit 182,400
Over/(Under) absorbed fixed production overheads (0)
Adjusted gross profit 182,400
(-) Non production costs
Variable non production overheads (RM0.65 × 45,600) 29,640
Fixed non production overheads (RM1.70 × 46,000) 78,200 (107,840)
Net profit 74,560

(b) Profit Statement (Marginal Costing)

RM RM
Sales (RM12 × 45,600) 547,200
(-) Cost of sales
Opening stock (RM5.20 × 0) 0
Production cost (RM5.20 × 46,000) 239,200
(-) Closing stock (RM5.20 × 400) (2,080) (237,120)
310,080
(-) Variable Non production cost
Variable non production overheads (RM0.65 × 45,600) (29,640)
Contribution 280,440
(-) Fixed costs
Fixed production overheads 128,800
Fixed non production overheads (RM1.70 × 46,000) 78,200 (207,000)
Net profit 73,440

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Question 2
The budget of Sinaran Sdn. Bhd. provides for the manufacture and sale of 10,000 units of
Product A per month, the unit standard cost being RM24, made up as follows:

RM
Direct material 10
Direct labour 4
Variable production overhead 2
Fixed production overhead 8
24

The selling price of Product A is RM32.

Production and sales for January, February and March are as follows:
January February
Production (units) 10,000 8,000
Sales (units) 8,000 9,000

Required:
Prepare operating statements for the three periods:
(i) assuming the company uses absorption costing.
(ii) assuming the company uses marginal costing.

Answer
(W1) Quantity
January February
(units) (units)
Opening stock 0 2,000
(+) Production 10,000 8,000
(-) Sales (8,000) (9,000)
Closing stock 2,000 1,000

(W2) Variable production cost per unit

RM
Direct material 10
Direct labour 4
Variable production overhead 2
16

(W3) Fixed production overhead per unit = Fixed production overhead

Normal quantity
RM8 = Fixed Production overhead
10,000 units
Fixed production overhead = 10,000 × RM8 = RM80,000

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(W4) Cost per unit

Marginal Costing Absorption Costing
(RM) (RM)
Variable production cost per unit 16 16
Fixed production overhead per unit - 8
16 24

(W5) Over/(Under) absorbed fixed production overhead

January February
(RM) (RM)
Fixed Overhead absorbed 80,000 64,000
(-) Fixed production overhead (80,000) (80,000)
Over/(Under) absorbed 0 (16,000)

(i) Operating Statement (Absorption Costing)

January February
RM RM RM RM
Sales 256,000 288,000
(-) Cost of sales
Opening stock 0 48,000
Production cost 240,000 192,000
(-) Closing stock (48,000) (192,000) (24,000) (216,000)
Unadjusted gross profit 64,000 72,000
Over/(Under) absorbed fixed 0 (16,000)
production overhead
Adjusted gross profit/Net 64,000 56,000
profit

(ii) Operating Statement (Marginal Costing)

January February
RM RM RM RM
Sales 256,000 288,000
(-) Cost of sales
Opening stock 0 32,000
Production cost 160,000 128,000
(-) Closing stock (32,000) (128,000) (16,000) (144,000)
Contribution 128,000 144,000
(-) Fixed Cost
Fixed production overhead (80,000) (80,000)
Net profit 48,000 64,000

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