Marginal Costing

Q. 1 Denton Company
Denton Company was incorporated on January 2, 20x4. During its first two years of operation,
the company reported net income as follows: (Rupees in '000')
20x4 20x5
Sales (Rs. 50 per unit) 1,000 1,500
Less: Cost of goods sold (Rs. 34 each) 680 1,020
under / (over) applied FOH (28) 14
652 1,034
Gross profit 348 466
Less: Selling and Admn. expenses 310 340
Net profit 38 126
Additional information:
Normal capacity Units 25,000
Fixed production overhead Rs 350,000
All administration expenses are fixed
Selling expenses are included sales man commission a variable expense.
No price variation during 20x4 and 20x5.
Required
1 Prepare income statement for each year using marginal costing. Marks: 15
2 Reconcile the absorption costing and marginal costing net profit for each year. Marks: 5

Q. 2 Modern Metal Works

Modern Metal Works deals in German Silver Sets, the standard production cost of which is
as under:
Direct materials 4 kgs @ Rs. 35 140
Direct labour 3 hrs @ Rs. 30 90
FOH - Variable 15
FOH - Fixed 100
Total Cost 345

Normal output is 16,000 units per annum, costs relating to selling, distribution and admin. are:
Variable 20% of sales revenue
Fixed Rs. 900.000 per annum
The only variance is a fixed production overhead volume variance.
There are no sets in finished goods stock as on 1st April, 2002. The fixed overheads
expenditure is spread throughout the year. The selling price per set is Rs. 700. The
number of sets to be produced and sold are budgeted as:
Six months ending Six months ending
30th September 2002 31st March 2002
Production units 8,500 7,000
Sales units 7,000 8,000

Required:
i Prepare statements showing sales, costs of sales and profits for each 6 months
period, using:
a Marginal costing Marks: 7
b Absorption costing Marks: 7
ii Prepare an explanatory statement reconciling each six months period profit using
marginal costing with that of absorption costing. Marks: 6
1
Q. 3 Moon Company
The management of Moon Company uses the following unit costs for the single
product it manufactures:
Projected cost
Rs. per unit
Direct materials (all variable) 300
Direct labour (all variable) 190
Factory overheads:
Variable cost 60
Fixed cost 50
Marketing, general and administrative cost:
Variable cost (per unit sold) 40
Fixed cost (based on 1,000 units / month) 28

The projected sales price is Rs. 800 per unit. The fixed costs remain fixed within the
relevant range of 400 to 1,600 units of production and sales.

Management has projected the following unit data for June:

Beginning inventory units 200
Production 900
Available 1,100
Sales (750)
Ending inventory 350

Required:
a) An income statement for June, using absorption costing method, with all
adjustments in Cost of Goods Sold.
b) An income statement for June, using marginal costing method.
c) Reconciliation of the difference in operating income, as computed in (a) & (b)

Q. 4 No price difference.
Income Statement
20x4 20x5
Production units 16,000 12,000
Sales units 12,000 15,000
Sales value 360,000 450,000
Cost of goods sold
Material 96,000 72,000
Labour 64,000 48,000
Factory overhead 160,000 120,000
Opening Stock 40,000 120,000
Closing Stock (120,000) (60,000)
240,000 300,000
Capacity variance (7,000) 21,000
233,000 321,000
Gross profit 127,000 129,000
Admin and selling expenses 40,000 47,500
Net profit 87,000 81,500
2
 Note:
There was no price difference in both years.
Opening stock for the year 20x4 was 2,000 units

Required:
a Determine the normal capacity level.
b Redraft above income statements for both periods in
marginal costing format
c Reconcile profit for both periods of both methods.
d Calculate break even point in units and in rupees
e Calculate number of units that must be sold in order
to earn net profit equal to 30% of sales. Marks: 20

Q 5 Following information has been extracted from the financial records of ATF Limited:
ICAP Production during the year units 35,000
Spring Finished goods at the beginning of the year
units 3,000
2009 Finished goods at the end of the year units 1,500
Sale price per unit Rs. 200
Fixed overhead cost for the year Rs. 1,000,000
Administration and selling expenses Rs. 2,000,000
Annual budgeted capacity of the plant units 40,000

The actual cost per unit, incurred during the year, was as follows:
Rupees
Material 70
Labour 40
Variable overheads 30

Company uses FIFO method for valuation of inventory. The cost of opening finished goods
inventory determined under the absorption costing method system was Rs. 450,000. Fixed
overhead constituted 16% of the total cost last year.

Required:
(a) Prepare profit statements for the year, under absorption and marginal costing
systems.
(b) Prepare reconciliation between the net profits determined under each system.Marks: 12
( Ans: NL Marginal Rs. (768,000) Absorption Rs. (802,500)

Q 6 Zulfiqar Limited makes and sells a single product and has the total production capacity of
ICAP 30,000 units per month. The company budgeted the following information for the month of
Spring January 2008:
2008 Normal capacity (units) 27,000
Variable costs per unit:
Production (Rs.) 110
Selling and administration (Rs.) 25
Fixed overheads:
Production (Rs.) 756,000
Selling and administration (Rs.) 504,000

3
 The actual operating data for January 2008 is as follows:
Production 24,000 units
Sales @ Rs. 250 per unit 22,000 units
Opening stock of finished goods 2,000 units
During the month of January 2008, the variable factory overheads exceeded the budget by
Rs. 120,000.
Required:
(a) Prepare profit statement for the month of January using:
− marginal costing; and
− absorption costing.
(b) Reconcile the difference in profits under the two methods. Marks: 15

Q 7 Mazahir (Pakistan) Limited manufactures and sells a consumer product Zee. Relevant information
ICAP relating to the year ended June 30, 2010 is as under:
Autimn
2010 Raw material per unit 5 kg at Rs. 60 per kg
Actual labour time per unit (same as budgeted) 4 hours at Rs. 75 per hour
Actual machine hours per unit (same as budgeted) 3 hours
Variable production overheads Rs. 15 per machine hour
Fixed production overheads Rs. 6 million
Annual sales 19,000 units
Annual production 18,000 units
Selling and administration overheads (70% fixed) Rs. 10 million

Salient features of the business plan for the year ending June 30, 2011 are as under:
(i) Sale is budgeted at 21,000 units at the rate of Rs. 1,100 per unit.
(ii) Cost of raw material is budgeted to increase by 4%.
(iii) A quality control consultant will be hired to check the quality of raw material. It will help
improve the quality of material procured and reduce raw material usage by 5%. Payment will
be made to the consultant at Rs. 2 per kg.
(iv) The management has negotiated a new agreement with labour union whereby wages would
be increased by 10%. The following measures have been planned to improve the efficiency:
- 30% of the savings in labour cost, would be paid as bonus.
- A training consultant will be hired at a cost of Rs. 300,000 per annum to improve the
working capabilities of the workers.
On account of the above measures, it is estimated that labour time will be reduced by 15%.
(v) Variable production overheads will increase by 5%.
(vi) Fixed production overheads are expected to increase at the rate of 8% on account of
inflation. Fixed overheads are allocated on the basis of machine hours.
(vii) The company has a policy of maintaining closing stock at 5% of sales. In order to avoid
stock-outs, closing stock would now be maintained at 10% of sales. The closing stocks are
valued on FIFO basis.

Required:
(a) Prepare a budgeted profit and loss statement for the year ending June 30, 2011 under
marginal and absorption costing.
(b) Reconcile the profit worked out under the two methods. (20 marks)