marginal and absorption paractice question

Management Accounting F2

MARGINAL AND ABSORPTION COSTING

Class practice question

1 Which of the following statements are correct with regard to marginal costing?

(i) Period costs are costs treated as expenses in the period incurred.(ii) Product costs can be identified with goods produced.(iii) Unavoidable costs are relevant for decision making.A (i), (ii) and (iii)B (i) and (ii) onlyC (i) and (iii) onlyD (ii) and (iii) only.

2 Cost and selling price details for product Z are as follows. $Direct materials 6.00Direct labour 7.50Variable overhead 2.50Fixed overhead absorption rate 5.00Total production cost 21.00Profit 9.00Selling 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.

(a) What was the marginal costing profit for the month?

A $45,400 B $46,800 C $53,800D $72,800

(b) What was the absorption costing profit for the month?

A $45,200 B $45,400 C $46,800D $48,400

Prepared by: Muzzammil Malik 1


3 Duo Co makes and sells two products, Alpha and Beta. The following information is available for period 1.

Production Sales Units UnitsAlpha 2,500 2,300Beta 1,750 1,600

Product Alpha Beta $ $Unit selling price 90 75

Unit variable costsDirect materials 15 12Direct labour ($6/hr) 18 12Variable production overheads 12 8

Fixed costs for the company in total were $110,000 in period 1 and are recovered on the basis of direct labour hours.

The profit reported for period 1 using marginal costing principles is $______

4 A firm has started to produce a single product with a unit selling price of $25. In the first year of production standard capacity was 100,000 units, production was 110,000 units and sales were 90,000 units. The actual costs incurred were:

Fixed VariableMaterials and labour $10 per unitFactory overhead $300,000 $5 per unitSelling and admin expenses $100,000 $2 per unit

What would be the values of net income, calculated using the different bases of marginal costing and absorption costing? Using marginal costing Using absorption costing $ $A 20,000 (40,000) lossB 20,000 80,000C 320,000 260,000D 320,000 380,000



Data for questions 5 and 6

Last year, a firm started to produce a single product with a unit selling price of $14. In the first year of operation standard capacity was 50,000 units, production was 50,000 units, and sales were 40,000 units. The actual costs incurred were:

Fixed VariableRaw materials – $3.00 per unit producedDirect labour – $2.00 per unit producedFactory overhead $200,000 $1.00 per unit producedSelling and administrative expenses $80,000 $1.00 per unit sold

5 Using absorption costing, what was the unit cost of closing inventory?

A $5.00B $6.00C $10.00D $13.00

6 What would be the value of net income using absorption costing?

A 40,000 profitB 64,000 profitC 40,000 lossD 64,000 loss

7 The cost structure for a product is as follows:

Per unit $Selling price 30Variable production costs 9Fixed production costs 6Total production costs 15

Non-production overheads:Variable 2Fixed 3Total cost 20

What is the contribution per unit?

A $10B $15C $19D $21



8 A company has established a marginal costing profit of £72,300. Opening stock was 300 units and closing stock is 750 units. The fixed production overhead absorption rate has been calculated as £5/unit.

What was the profit under absorption costing?$________

9 A company which uses absorption costing has a profit of £37,500 for a period. Opening stock was 100 units and closing stock was 350 units. The fixed production overhead absorption rate is £4 per unit.

What is the profit under marginal costing?$_________

10 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?

Higher Lower $______ $_______

11 The following data is available for period 9.

Opening inventory 10,000 unitsClosing inventory 8,000 unitsAbsorption costing profit $280,000

The profit for period 9 using marginal costing would be:A $278,000B $280,000C $282,000D Impossible to calculate without more information

12 The number of units of finished goods inventory at the end of a period is greater than at the beginning.

What would the effect be of using the marginal costing method of inventory valuation?

A less operating profit than the absorption costing methodB the same operating profit as the absorption costing methodC more operating profit than the absorption costing methodD more or less operating profit than the absorption costing



13 In a period, opening inventories were 12,600 units and closing inventories 14,100 units. The profit, based on marginal costing, was $50,400 and profit using absorption costing was $60,150.

The fixed overhead absorption rate per unit is

A $4.00B $4.27C $4.77D $6.50

14 In a period, opening inventories were 10,000 units. Profits, based on marginal costing, were $100,000 and profit under absorption costing was $105,000

Calculate the closing inventory of the period.

15 Annual fixed costs are expected to be $120,000. The company's product sells for $20 per unit with variable costs of $12 per unit.

What is the break-even point?

A 5,000 unitsB 10,000 unitsC 15,000 unitsD 20,000 units

16 A company manufactures and sells a single product with a variable cost per unit of $36. It has a contribution to sales ratio of 25%. The company has weekly fixed costs of $18,000.

What is the weekly break-even point (in units)?A 1,500B 1,600C 1,800D 2,000

17 company manufactures a single product with a variable cost per unit of £22. The contribution to sales ratio is 45%.Monthly fixed costs are £198,000.

What is the breakeven point (in units)?

______ Units.



18 A company has established a budgeted sales revenue for the forthcoming period of £500,000 with an associated contribution of £275,000. Fixed production costs are £137,500 and fixed selling costs are £27,500.

What is the breakeven sales revenue?A £75,625B £90,750C £250,000D £300,000

19 A company has the following budgeted information for the coming month:

Budgeted sales revenue £500,000Budgeted contribution £200,000Budgeted profit £50,000Selling price £50 What is the budgeted break-even in units?________ units

20 An organisation manufactures and sells a single product. At the budgeted level of output of 5,500 units per week, the unit cost and selling price structure is as follows:

£ per unit £ per unitSelling price 60Less – variable production cost 15Less – other variable cost 1 5Less – fixed cost 30 ––– (50) –––Profit 10 –––

What is the breakeven point (in units per week)?______ Units.

21 company manufactures a single product which it sells for £20perunit. The product has a contribution to sales ratio of 50%The company’s weekly break-even point is sales of £24,000

What would be the profit in a week when 1,500 units are sold?$__________



The following data relates to questions 22 and 23

Data concerning a company's single product is as follows. $ per unitSelling price 6.00Variable production cost 1.20Variable selling cost 0.40Fixed production cost 4.00Fixed selling cost 0.80

Budgeted production and sales for the year are 10,000 units.

22 What is the company's breakeven point, to the nearest whole unit?_______ Units.

23 It is now expected that the variable production cost per unit and the selling price per unit will each increase by 10%, and fixed production costs will rise by 25%.

What will be the new breakeven point, to the nearest whole unit?_______ Units.

24 A company wishes to make a profit of $150,000. It has fixed costs of $75,000 with a C/S ratio of 0.75 and a selling price of $10 per unit.

How many units would the company need to sell in order to achieve the required level of profit?______ units

25 An organisation manufactures a single product which is sold for £60 per unit. The organisation’s total monthly fixed costs are £54,000 and it has a contribution to sales ratio of 40%. This month it plans to manufacture and sell4,000 units.

What is the organisation’s margin of safety this month (in units)?A 1,500B 1,750C 2,250D 2,500

26 A company has calculated its margin of safety as 20% on budgeted sales and budgeted sales are 7500 units per month.

What would be the budgeted fixed costs if the budgeted contribution was £25 per unit?________ units



27 The management accountant of a company has calculated his firm's break-even point from the following data: $Selling price per unit 20Variable costs per unit 8Fixed overheads for next year 79,104

It is expected that next year the firm will produce and sell 7500 units.

What is the margin of safety?

A 12.1%B 13.8%C 47.3%D 89.6%

28 A company manufactures one product which it sells for £40 per unit. The product has a contribution to sales ratio of 25%. Monthly total fixed costs are £80,000. At the planned level of activity for next month, the company has a margin of safety of £94,000 expressed in terms of sales value

What is the planned activity level (in units) for next month?________ units.

29 A company sells a single product which has a contribution of £36 per unit and a contribution to sales ratio of 25% this period it is forecast to sell 2,000 units giving it a margin of safety of £2,000 in sales revenue terms..What are the company’s total fixed costs per period?$________

30 A company generates a 12 per cent contribution on its weekly sales of $280,000. A new product, Z, is to be introduced at a special offer price in order to stimulate interest in all the company's products, resulting in a 5 per cent increase in weekly sales of the company's other products. Product Z will incur a variable unit cost of $2.20 to make and $0.15 to distribute. Weekly sales of Z, at a special offer price of $1.90 per unit, are expected to be 3,000 units.

The effect of the special offer will be to increase the company's weekly profit by:$________

31 A company's single product has a contribution to sales ratio of 20%. The unit selling price is $12. In a period when fixed costs were $48,000 the profit earned was $5,520.

Direct wages were 30% of total variable costs, and so the direct wages cost for the period was

$________



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36 A technical writer is to set up her own business. She anticipates working a 40-hour week and taking four weeks' holiday per year. General expenses of the business are expected to be $10,000 per year, and she has set herself a target of $40,000 a year salary. Assuming that only 90% of her time worked will be chargeable to customers, her charge for each hour of writing (to the nearest cent) should be



$________37

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marginal and absorption paractice question