Marginal Costing – Assignment I

Key factor
Q.1 The following particulars are obtained from costing records of a factory.
Product A Product B
(per unit) (per unit)
Rs. Rs.
Selling Price 200 500
Material (Rs. 20 per litre) 40 160
Labour (Rs. 10 per hour) 50 100
Variable Overhead 20 40
Total Fixed Overheads –Rs. 15,000
Comment on the profitability of each product when:
(a) Raw material is in short supply;
(b) Production capacity is limited;
(c) Sales quantity is limited;
(d) Sales value is limited;
(e) Only 1,000 litres of raw material is available for both the products in total and
maximum sales quantity of each product is 300 units.
Q.2 A manufacturer produces three products whose cost data are as follows:
X Y Z
Direct materials (Rs./unit) 32.00 76.00 58.50
Direct Labour:
Department. Rate / hour (Rs.) Hours Hours Hours
1 2.50 18 10 20
2 3.00 5 4 7
3 2.00 10 5 20
Variable overheads (Rs.) 8 4.50 10.50
Fixed overheads: Rs. 400,000 per annum.
The budget was prepared at a time, when market was sluggish. The budgeted quantities
and selling prices are as under:
Product Budgeted quantity Selling Price/unit
(Units) (Rs.)
X 19,500 135
Y 15,600 140
Z 15,600 200
Later, the market improved and the sales quantities could be increased by 20 per cent for
product X and 25 per cent each for product Y and Z. The sales manager confirmed that
the increased sales could be achieved at the prices originally budgeted. The production
manager stated that the output could not be increased beyond the budgeted level due to
the limitation of direct labour hours in department 2.

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Required: (i) Prepare a statement of budgeted profitability.
(ii) Set optimal product mix and calculate the optimal profit.
Acceptance of sales order
Q.3 X Company manufactures cookware. Expected annual volume of 1,00,000 sets per
year is well below its full capacity of 1,50,000. Normal selling price is Rs. 40 per set.
Manufacturing cost is Rs. 30 per set (Rs 20 variable and Rs. 10 fixed). Total fixed
manufacturing cost is Rs. 10,00,000. Selling and administrative expenses are expected to
be Rs. 5,00,000 (Rs. 3,00,000 fixed and Rs. 2,00,000 variable). A departmental store
offers to buy 25,000 sets of Rs. 27 per set. No extra selling and administrative costs
would be caused by the order. Further, the acceptance of this order will not affect regular
sales. Should the offer be accepted?
Q.4 X Calculators Ltd. manufactures engineering calculators and the selling price was
fixed at Rs. 400. The following are the cost particulars.
Rs.
Direct Material Cost 140
Direct Labour Cost 40
Variable Factory Overhead 20
Other Variable Cost 20
Fixed Overhead 5,00,000 per annum
Commission 30% on selling price
The company was producing only 10,000 units, since the demand was only 10,000 units.
However, the company has the capacity to produce another 1,000 units without any
additional fixed overheads. One of the distributors offered that he would take 1,000 units
in addition to his normal quota, but at a selling price of Rs. 320 per unit. He was also
prepared to accept only half of his regular commission for this transaction.
The Managing Director wants you as the Management Accountant to prepare a statement
to the Board of Directors with your specific recommendations.
Determination of selling price
Q.5 A manufacturing company has an installed capacity of 1,50,000 units per annum. Its
cost structure is given below:
(Per unit) Rs.
Variable costs 10
Labour (Minimum Rs. 1,00,000 per month) 10
Overheads 4
Fixed overheads: Rs. 1,92,300 per annum
Semi-variable overheads Rs. 60,000 per annum at 75% capacity, which increases by Rs.
4,000 per annum for every 5% increase in capacity utilization for the year as a whole.
The capacity utilization for the next year is estimated at 75% for three months, 80% for
six months and 90% for the remaining part of the year. If the company is planning to
have a profit of 20% on the selling price, calculate the selling price per unit?
Q.6 A highly skilled technician is paid Rs. 100 per hour and is fully engaged in the
manufacture of a certain product which earns a contribution of Rs. 200 per hour to firm.
The firm has received an order, which will require the services of the technician for 25
hours. If the material and other processing costs amount to Rs. 11,250 and mark up 20%
on cost, what price should be quoted for the new order?

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CVP Analysis
Q.7 A company has developed a new product. The sales volume of the new product was
estimated to be between 15,000 and 20,000 units per month at a price of Rs. 20 per unit.
Alternatively, if the selling price is reduced to Rs. 18 per unit, the sales volume will be
between 24,000 and 36,000 units per month. If the production is maintained below
20,000 units per month, the variable manufacturing cost will be Rs. 16.50 per unit and the
fixed costs Rs. 48,500 per month. If the production exceeds 20,000 units per month, the
variable manufacturing cost will be reduced to Rs. 15.50 per unit, but the fixed costs will
increase to Rs. 64,500 per month. The company paid Rs. 40,000 as fee for market survey
and in addition incurred a cost of Rs. 60,000 in developing the new product.
In the event of taking up this new line of business, it will be necessary to use the building
space, which has been let out for a rental of Rs. 5,600 per month.
You are required to analyze the Potential Profitability of the proposal of the company at
different levels of output and make suitable recommendations relating to the price and
volume of output to be set.
Marginal costing v. Absorption costing
Q.8 You company has a production capacity of 2,00,000 units per year. Normal capacity
utilization is reckoned as 90%. Standard variable production costs are Rs. 11 per unit.
The fixed costs are Rs. 3,60,000 per year. Variable selling costs are Rs. 3 per unit and
fixed selling costs are Rs. 2,70,000 per year. The unit selling price is Rs. 20. In the year
just ended on 30th June 2008, the production was 1,60,000 units and sales were 1,50,000
units. The closing inventory on 30th June 2008 was 20,000 units. The actual variable
production costs for the year were Rs. 35,000 higher than the standard.
(i) Calculate the profit for the year:
(a) by the absorption costing method, and (b) by the marginal costing method.
(ii) Explain the difference in the profits.
Q.9 X Fabrics manufactures quality napkins at its unit in Tirupur. The unit has a capacity
of 60,000 napkins per month. Present monthly production for April is 40,000 napkins.
Cost incurred for production is as below: (per unit).
Direct material Rs. 6 No fixed cost
Direct Labour Rs. 2 Fixed cost 75%
Manufacturing overhead Rs. 4 Variable 25%
Total Rs. 12
The marketing cost per unit is Rs. 7 (Rs. 5 is variable). Marketing costs include
distribution costs and customer service costs. Present selling price is Rs. 22.50 per unit
Due to a strike at its existing napkin supplier, a hotel group has offered to buy 10,000
napkins from X Fabrics @Rs. 11 per napkin for the month of June. No further sales to the
hotel are anticipated. Fixed manufacturing costs and marketing costs are tied to the
60,000 napkins. The acceptance of the special order is not expected to affect the selling
price to regular customers.
No marketing costs involved in special order. Prepare:
(i) Budgeted income statement for June.
(ii) Actual income statement under absorption costing for April.
(iii) Should X Fabrics accept the special order from the hotel or not?