MARGINAL ABSORPTION COSTING

Question No.1
ABC limited is considering using direct costing method for decision making instead of
absorption costing method. Following data has been summarized for that purpose:
Annual Maximum Plant capacity
Annual Normal Plant capacity
Fixed factory overhead for the year
Fixed Marketing Expenses for the year
Fixed Administrative Expenses for the year
Sales price per unit
Standard variable manufacturing cost per unit
Variable marketing expenses per unit sold
Budgeted production for the year
Actual production for the year
Sales for the year
Opening finished goods inventory
Unfavorable variances from standard
-variable manufacturing costs

Units
Units
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Units
Units
Units
Units
Rs.

50,000
40,000
500,000
100,000
15 0,000
1,000
400
100
40,000
30,000
28,000
1,000
500,000

All variances are written off directly at year end as an adjustment to cost of goods sold.
Required:
a) Income statement for the year under direct (Marginal) method.
b) Operating income for the year if abruption costing had been used.
Question No.2
Following data relates to Shehla Sister Ltd engaged in production and marketing a computer
component:
July 1998
August 1998
Units produced
10,500
5,000
Units sold
5,000
10,000
Fixed manufacturing cost
Unit selling price
Variable cost per unit
Per unit fixed factory overhead rate
Marketing overheads fixed
Administrative overheads

Rupees
500,000
500
250
50
120,000
130,000

Rupees
500,000
500
250
50
120,000
130,000

Required:
a) Comparative income statement for each month on absorption costing basis.
b) Comparative income statement for each month on marginal costing basis.

Question No.3
Following data relates to Shahnoor Industries Ltd:
Number of units produced
55,000
Number of units sold
50,000
Selling price per unit
Rs.200
Production cost per unit:
Raw material
Rs.75
Direct labor
Rs.50
Variable Factory Overhead
50% of DL
Fixed Factory Overhead
Rs.500,000
Administrative and Selling Overhead
Rs.1,000,000
Required:
Prepare operating statements using absorption and marginal costing methods.
Calculate closing stock value under the above two methods.
Question No.4
Shaheen Ltd. manufactures around 10,000 machines in a month. The break-up of unit cost is as
under:
Rs.
Direct Material
750
Direct Labor
300
Variable Overhead
150
Fixed Overhead
600
1,800
Selling price of machine is Rs.2,400. Production and sales for periods 1, 2 and 3 were as under
Period 1
Period 3
Production
Sales

10,000
8,000

8,000
9,000

Period 2
11,000
12,000

Production can be increase to 11,000 units without a corresponding increase in fixed overhead
Required:
Prepare operation statements for the three periods assuming the company uses:
a) Absorption Costing: and
b) Marginal Costing

Question No.5
Following information pertains to Dilber Associates:
Normal Capacity of plant is 20,000 units per month or 240,000 units a year.
Variable costs per unit are:
Rs.
Direct Material
3.00
Direct Labor
2.25
Variable Factory Overhead
0.75
Total
6.00
Fixed overheads are Rs.300,000 per year or Rs.1.25 per unit at normal capacity. Company is
using units of product as basis for applying overheads. Fixed marketing and administrative
expenses are Rs.60,000 per year and variable marketing expenses are Rs.3,600, Rs.4,000,
Rs.4400 and Rs.3,000 for the first, second, third and fourth month respectively.
Actual and applied variable overhead are the same. Likewise no material or labor variance exists.
There is no work in process. Standard costs and finished goods inventories in units are:

First
----17,500
17,500
-----

Second
----21,000
18,000
3,000

MONTH
Third
3,000
19,000
21,000
1,000

Fourth
Units in beginning inventory
1,000
Units produced
20,000
Units sold
16,000
Units in ending inventory
4,500
Selling price per unit is Rs.10 per unit.
Required:
From the above information prepare income statement through Absorption costing and Direct
Costing.

Question No.6
Khan Company is a small business which has the following budgeted marginal costing and loss
account for the month ended 30.06.2004:
Rs.
Rs.
Sales
96000
Cost of sales:
Opening stock
6000
Production
72000
Closing stock
(14000)
(64000)
32000
Other variable cost-selling expenses
(6400)
Contribution
25600
Fixed Cost:
Production Overhead
8000
Administration
7200
Selling
2400
(17600)
Net Profit
8000
Standard cost per unit is:
Rs.
Direct Material (1 kg)
16
Direct Labor (3 hours)
18
Variable cost (3 hours)
6
Budgeted selling price per unit is Rs.60
The companys normal level of activity is 4000 units per month. It has budgeted fixed production
costs at Rs.8000 per month and absorbed them on the normal level of the activity of units
produced.
Required:
Prepare budgeted profit and loss under absorption costing for the month ended 30.06.2004.