Absorption and marginal

costing
 Q1

2/3/17 Prepared by: Zaira Anees

 Q1
Answer the following
What will be the unit product cost under absorption
costing _______.
What will be the unit product cost under marginal costing
______
What will be gross profit per unit ________________.
What will be contribution per unit ________________
What will be variable conversion cost per unit __________
If actual production during the period was 405,000 units
and actual fixed overheads were 2,037,000, then
calculate under or over absorption of fixed
overheads________

2/3/17 Prepared by: Zaira Anees

 Q2
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
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.
Profit under absorption and marginal costing??
 Q2
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 marginal costing was:______________
The value of the inventory of Product X at the end of October
using absorption costing was:______________
 Q3
A company is reviewing actual performance to budget to
see where there are differences. The following standard
information is relevant:
per unit
Direct materials 4
Direct labour 16
Fixed production overheads 5
Variable production overheads 10
Variable selling cost 3
Statement 1: If absorption costing is used, finished stocks
will be valued at 35 per unit
Statement 2: If marginal costing is used, finished stocks
will be valued at 30 per unit

2/3/17 Compiled by: Zaira Anees 6

 Question 4
Product cost is normally:
a. Higher in Absorption costing than
Marginal costing
b. Higher in Marginal costing than
Absorption costing
c. Equal in both Absorption and
Marginal costing
d. None of the given options

2/3/17 Compiled by: Zaira Anees 7

 Q5
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

2/3/17 Compiled by: Zaira Anees 8

 Q6
Using absorption costing, unit cost of product
includes which of the following combination of
costs?
Direct materials, direct labor and fixed
overhead
Direct materials, direct labor and variable
overhead
Direct materials, direct labor, variable
overhead and fixed overhead
Only direct materials and direct labor
2/3/17 Compiled by: Zaira Anees 9
 Q7
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
A 30,000 lower. B 30,000 higher.
C 60,000 lower. D 60,000 higher.

2/3/17 Compiled by: Zaira Anees 10

 Question 8
A company manufactures and sells a single
product. Fixed overhead absorption rate is 4
per unit. 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
 Question 9
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
________________ [higher / lower]
 Question 10
The overhead absorption rate for product T is 12
per unit.
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
 Question 11
A company has an opening inventory
of 4,000 units. Closing inventory was
around 4,500 units. Company is
currently using marginal costing. If
company switches to absorption
costing then
A. Profit will increase
B. Profit will decrease
Profit will remain same
2/3/17 Compiled by: Zaira Anees 14
 Question 13
If profit under marginal costing is higher
than profit under absorption costing then
which of the following statement is
correct?
A. Closing stock of current period is higher than
closing stock of last period.
B. Closing stock of current period is lower than
closing stock of last period.
C. Closing stock of current period is equals to
closing stock of last period.
D. None of above

2/3/17 Compiled by: Zaira Anees 15

 True or False
Manufacturing cost is equals to prime
cost plus manufacturing and non-
manufacturing overheads.
Variable manufacturing cost is sum of
prime cost and variable
manufacturing overheads.
Variable cost means prime cost plus
variable manufacturing and non-
manufacturing overheads
 True or False
Contribution margin is equals to sales less
variable manufacturing cost.
Budgeted overheads are estimated overheads
and it is calculated at the beginning of year.
Absorption of overheads means amount of
overheads that has been charged to
production.
Under / over absorption of overheads is
calculated by taking difference between
budgeted and actual overheads
 True or False
Expense of canteen should be distributed
among all departments on the basis of
floor area.
Indirect labour cost should be apportioned
among all departments on the basis of
number of indirect labours.
Total overheads of service department are
distributed among all production
departments; this process is known as
apportionment.
 True or False
In absorption costing, fixed production overheads
are treated as product cost and in marginal costing
fixed production overheads are treated as period
cost.
In an organisation which manufactures number of
different products in one large factory, the rent of
that factory is an example of a direct expense when
costing a product.
When a manufacturing company operates a
marginal costing system, fixed production
overheads are included in calculation of cost per
unit.
 True or False
If closing stock is higher than opening stock then
profit under absorption costing gives higher than
marginal costing.
If overheads are 2,500 under absorbed then this
means that overheads amounting 2,500 would not
be recovered from customer.
If a company manufactures more than one product;
it should absorb overheads on the basis of either
machine hours or labour hours.
For the calculation of breakeven in sales volume,
total fixed manufacturing cost is divided by
contribution margin per unit.