FROM THE DESK OF MAESAM RAZA

PRACTISE QUESTION

Question # 1
ABC Ltd 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 Units 50,000

Annual Normal Plant capacity Units 40,000
Fixed Factory overhead for the year Rs. 500,000
Fixed Marketing Expenses for the year Rs. 100,000
Fixed Administrative expenses for the year Rs. 150,000
Sales price per unit Rs. 1,000
Standard variable manufacturing cost per unit Rs. 400
Variable marketing expenses per unit sold Rs. 100
Budgeted production for the year Unit 40,000
Actual production for the year Unit 30,000
Sales for the year Unit 28,000
Opening finished goods inventory Unit 1,000

Required:
(a) Income statement for the year under direct method.
(b) Operating income for the year if absorption costing had been used.
Question # 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
Rupees Rupees
Fixed manufacturing cost 500,000 500,000
Unit selling price 500 500
Variable cost per unit 250 250
Per unit fixed factory overhead rate 50 50
Marketing overheads fixed 120,000 120,000
Administrative overheads 130,000 130,000

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

MARGINAL AND ABSORPTION COSTING 1

 FROM THE DESK OF MAESAM RAZA

Question # 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 Labour Rs.50
Variable Factory Overhead 50% of direct labour cost
Fixed Factory Overhead Rs.500,000
Administrative and Selling Overhead Rs.1,000,000

Required:
(a) Prepare Operating statements using Absorption and Marginal Costing method.
(b) Calculate closing stock value under the above two method.
Question # 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 Labour 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 2 Period 3
Production 10,000 8,000 11,000
Sales 8,000 9,000 12,000

Production can be increase to 11,000 units without a corresponding increase in fixed

overhead.

Required:
Prepare Operating statements for the three periods assuming the company uses:
(a) Absorption Costing; and
(b) Marginal Costing

MARGINAL AND ABSORPTION COSTING 2

 FROM THE DESK OF MAESAM RAZA

Question # 5
Ali Ltd makes and sells one product, the standard production cost of which is as follows
for one unit:
Rs.
Direct labour (3 hours at Rs.6 per hour) 18
Direct material (4 kgs at Rs.7 per kg) 28
Variable factory Overhead 3
Fixed factory overhead 20
Standard production cost 69

Normal output is 16,000 units per annum and this figure is used for the fixed factory
overhead calculation.
Costs relating to selling, distribution and administrative are:
Variable 20% of sales value
Fixed Rs.180,000 per annum
The only variance is a fixed factory overhead volume variance. There are no units in
finished goods stock at 1.10.2003. The fixed overhead expenditure is spread evenly
throughout the year. The selling price per unit is Rs.140.

For each of six monthly periods, the numbers of units to be produced and sold are
budgeted as:
Six month ending Six month ending
31.3.2004 30.9.2004
Production units 8,500 7,000
Sales units 7,000 8,000

Required:

(a) Prepare statements for the management showing sales, costs and profits for
each of the six monthly periods, using:
 Marginal Costing
 Absorption Costing
(b) Prepare an explanatory statement reconciling for each six monthly period the
profit using marginal costing with the profit using absorption costing.

Question # 6
Modem Metal Works details in German Silver Sets; the standard production cost of
which is as under:
Rs.
Direct material 4kg @ Rs.35 140
Direct labour 3 Hrs @ Rs.30 90
F.O.H- Variable 15
Fixed 100
Total cost 345
MARGINAL AND ABSORPTION COSTING 3
 FROM THE DESK OF MAESAM RAZA

Normal output is 16,000 units per annum, costs relating to selling, distribution and
administration are:
Variable 20% of sales value
Fixed Rs.900,000 per annum
The only variance is fixed (production) OH 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
numbers of sets to be produced and sold are budgeted are:

Six month ending Six month ending

30th September 2002 31st March 2003
Production 8,500 7,000
Sales 7,000 8,000

Required:
(i) Prepare statements showing sales, costs of sales and profit for each six month
period, using:
 Marginal costing
 Absorption costing
(ii) Prepare an explanatory statement reconciling each six months period profit
using marginal costing with that of absorption costing.

Question # 7
A manufacturer produces and sells single product. Summarized data of operations for
two years are given below.
Rs.
Selling price per unit 4,000
Manufacturing costs:
Variable cost per unit:
Direct materials 880
Direct labour 480
Variable overhead 240
Fixed cost per year 9,600,000
Selling and administrative costs:
Variable (per unit sold) 400
Fixed cost per year 5,600,000

Year 1 Year 2
Beginning inventory – units -------- 2,000
Units produced 10,000 6,000
Units sold 8,000 8,000
Ending inventory – units 2,000 --------

Required:
(i) Prepare income statement for each year using absorption costing.
MARGINAL AND ABSORPTION COSTING 4
 FROM THE DESK OF MAESAM RAZA
(ii) Prepare income statement for each year using direct costing.
Question # 8
Basic standard cost data of Zahoor & Co. is as under:
Normal Capacity (monthly) 50,000 units
Production, October, 2007 45,000 units
Sales October, 2007 47,500 units

Standard variable costs per unit: Rupee(s)

Material and labour 8.00
Factory overhead 2.00
Distribution expenses 1.00
Operating variances:
Representing excessive incurrence of variable costs Rs.4,500
Selling price per unit Rs.20

Fixed cost for October, 2007:

Manufacturing expenses (Rs.4/- per unit on normal capacity) Rs.200,000
Distribution expenses 75,000
Administration expenses 50,000
Others 25,000

Required:
(a) Prepare income statement for the month of October, 2007 under:
(i) Absorption Costing, and
(ii) Marginal Costing

(b) Prepare a reconciliation of incomes under absorption costing and marginal

costing for October, 2007.
Question # 9
Flexible budget for a product as prepare by Anchor Ltd, is given below:

Sales - unit 10,000 15,000 20,000

Rs. Rs. Rs.
Sales 800,000 1,200,000 1,600,000
Manufacturing cost:
Variable 300,000 450,000 600,000
Fixed 200,000 200,000 200,000
Total manufacturing cost 500,000 650,000 800,000
Marketing and other expenses:
Variable 200,000 300,000 400,000
Fixed 160,000 160,000 160,000
Total Marketing and other expense 360,000 460,000 560,000
Operating income / (loss) (60,000) 90,000 240,000

Additional information:
MARGINAL AND ABSORPTION COSTING 5
 FROM THE DESK OF MAESAM RAZA
 The budget of 20,000 units will be used for allocating the fixed manufacturing
cost to units of product.
 At the end of first six months, 12,000 units have been completed and 6,000 units
have been sold @ Rs.80 per unit.
 All fixed costs are budgeted and incurred uniformly throughout the year and all
costs incurred, coincide with budget.
 The over or under applied fixed manufacturing cost is deferred unit the end of
the year.

Required:
(a) Calculate the amount of fixed manufacturing cost applied to production during
the first six months under absorption costing.
Prepare income statements for the first six months under:
(i) Absorption Costing
(ii) Marginal Costing
(b) Reconcile the difference in operating income under absorption costing and
marginal costing.

MARGINAL AND ABSORPTION COSTING 6