Marginal Costing

Some businesses only want to know the variable cost of the units they make, regarding fiixed
costs as a period cost.
A business may prefer marginal costing as it only includes costs that are relevant for decision
making i.e. variable ones. Also the business may not have significant fixed overheads and so
marginal costing could be more appropriate.

Performa
Sales x
Less Variable Production Costs
Opening Stock x
Direct Material x
Direct Labour x
Direct Expense x
Indirect Material x
Indirect Labour x
Indirect Expenses x
Less Closing stock (x) (x)
Less Variable Non Production Costs
Variable Selling , Admin and Distribution (x)
Contribution x
Contribution is an important
Less Fixed Costs concept in marginal costing.
Fixed Production Overheads x Contribution is an abbreviation of
Fixed Non Production Overheads x (x) “contribution towards fixed costs
Net Profit x and profit”.

Contribution takes account of all

In Marginal Costing we value Opening and Closing stock on
variable costs.
Total Variable Production Cost per unit

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
Question # 1
Total per litre
Direct Material 12
Direct Labour 21
Direct Expense 11
Indirect Labour 6
production overhead – variable 8
– fixed = 10,000
Non production overhead – fixed = 5,000
Production 5,000 litres Sales 5,000 litres (at £112 per litre)
Required:
(a) Prepare a profit statement for the period using Marginal costing.
Question # 2
The following Data is for Quarter # 01
Total per litre
Direct Material 12
Direct Labour 21
Direct Expense 11
Indirect Labour 6
production overhead – variable 8
– fixed = 10,000 per annum
Non production overhead – variable 2
– fixed = 5,000 per annum

Production 5,000 litres Sales 5,000 litres (at £112 per litre)
Required:
(a) Prepare a profit statement for the quarter using Marginal costing.
Question # 3
Total per litre
Direct Material 112
Direct Labour 121
Direct Expense 111
Indirect Labour 16
production overhead – variable 18
– fixed = 10,000
Non production overhead – variable 12
– fixed = 5,000
Production 5,000 litres Sales 4,000 litres (at £1000 per litre)
Required:
(a) Prepare a profit statement for the period using Marginal costing.
Prepared by: Mohammad Faizan Farooq Qadri Attari
ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
Prepared by: Mohammad Faizan Farooq Qadri Attari
ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
Question # 4
Total per litre
Direct Material 11
Direct Labour 12
Direct Expense 25
Indirect Labour 26
production overhead – variable 1.5
– fixed = 3,000
Variable Selling overheads 0.5
fixed Non Production overheads = 2,000
Production 8,000 litres Sales 3,000 litres (at £111 per litre)
Required:
(a) Prepare a profit statement for the period using Marginal costing.
Question # 5
A company has the following costs for its single product,
£ per litre
Prime costs 5·20
Production overhead – all fixed 2·80
Non-production overhead – variable 0·65
– fixed 1·70
Actual production and sales in the period were:
Production 46,000 litres Sales 45,600 litres (at £12·00 per litre)
There was no finished stock at the beginning of the period.
Required:
(a) Prepare a profit statement for the period using Marginal costing.

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
Question # 6
P Ltd manufactures a specialist photocopier. Increased competition from a new manufacturer
has meant that P Ltd has been operating below full capacity for the last two years.

The budgeted information for the last two years was as follows:
Year 1 Year 2
Annual sale(units) 70 72
Annual production (units) 75 70
Selling price (for each photocopier) £50,000 £50,000
Direct costs (for each photocopier) £20,000 £20,000
Variable production overheads (for each photocopier) £11,000 £12,000
Fixed production overheads £525,000 £525,000

There was no opening stock at the beginning of year 1.

Required:
(a) Prepare the actual profit and loss statements for each of the two years using marginal
costing.

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590