Question Tag: Marginal Costing

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  • 12 Marks

MI – May 2016 – L1 – SB – Q1b – Costing Methods

Calculate production cost per unit, variable cost, contribution, break-even point, and total non-production cost.

Grammar Limited manufactures product G of which the sales for the year 2015 was ₦25,000,000 at the unit price of ₦40. Production overhead and selling overhead were ₦2.50 and ₦1.50 per unit, respectively. The following additional information are available for the year 2015:

₦/unit
Direct material used 8.50
Direct labour 7.50
Fixed production overhead 6.00
Fixed selling overhead 2.00
Administration overhead 4.00

You are required to calculate:

i. Full production cost per unit and value
ii. Variable cost per unit and value
iii. Contribution per unit and value
iv. Break-even point in value
v. Total non-production cost per unit and value
vi. New break-even point (to the nearest Naira) if additional distribution expenses of ₦1.50/unit was incurred

i. Full production cost per unit and value:

Production in units = 25 000 000 / 4 = 625,000 units

ii. Variable cost per unit and value:

 

Value 625,000 x N20.00 = 12,000,000

iii. Contribution per unit and value

Value 625,000 x N20.00 = 125,000,000

iv. Break even point in value

= N15,000,000

v. Total non-production cost per unit and value

Value 625,000 x N8.50 = N5,312,000

vi. New break-even cost point

=

=

= = N18,243,243

 

 

 

  • 8 Marks

MI – May 2016 – L1 – SB – Q1a – Costing Methods

State two advantages and two disadvantages of absorption and marginal costing.

State any TWO advantages and any TWO disadvantages of absorption and marginal costing.
(8 Marks)

Advantages of Absorption Costing:

  1. Provides a more accurate cost per unit as all costs, including fixed costs, are absorbed.
  2. Ensures compliance with accounting standards for financial reporting.

Disadvantages of Absorption Costing:

  1. Can be misleading for decision-making, as it allocates fixed costs to unit costs.
  2. May encourage overproduction to absorb fixed costs.

Advantages of Marginal Costing:

  1. Useful for decision-making as it focuses on variable costs and contribution margin.
  2. Simplifies cost control by excluding fixed overheads in unit cost calculations.

Disadvantages of Marginal Costing:

  1. Does not conform with external financial reporting standards.
  2. Ignores the importance of fixed costs in total cost structure.
  • 1 Marks

MI – May 2016 – L1 – SA – Q6 – Costing Techniques

Calculate the net profit using marginal costing based on given absorption costing profit and inventory data.

The net profit was N2,650,000 using absorption costing and the closing inventory was 14,600 units. Production overhead absorption rate was N18.50 per unit. If the Non-production absorption rate was N14.00 per unit, then the net profit using marginal costing is:
A. N2,379,900
B. N2,445,600
C. N2,650,000
D. N2,854,400
E. N2,920,100

Answer:
A. N2,379,900

Explanation:
To convert the profit from absorption costing to marginal costing, we need to adjust for the fixed production overheads included in the closing inventory. The formula is:

Change in Profit = Change in Inventory × Fixed Production Overhead per unit

The change in profit due to inventory is calculated as:


=N270,100 = N270,100

Since we are moving from absorption to marginal costing, we subtract this amount from the absorption costing profit:

N2,650,000 − N270,100 = N2,379,900

Thus, the profit using marginal costing is N2,379,900.

  • 1 Marks

MI – May 2024 – L1 – SA – Q6 – Costing Techniques

Calculates the fixed cost based on total cost and activity levels.

The following data were extracted from UVW Limited for a single product V: Activity (units) Total Cost (N) 144,000 3,624,000 842,000 12,000,000 Calculate the value of fixed cost.

A. N8,376,000
B. N6,200,000
C. N3,264,000
D. N1,896,500
E. N1,896,000

Answer: E. N1,896,000

Explanation: The fixed cost is calculated using the high-low method to determine the variable and fixed components. The variable cost per unit is first identified by dividing the difference in total costs by the difference in activity levels. Once the variable cost is known, it is used to determine the fixed cost by subtracting the total variable cost from the total cost at either activity level.

  • 1 Marks

MI – May 2024 – L1 – SA – Q5 -Budgeting

Identifies the budgeting process that adjusts costs based on activity levels.

A budgeting process that analyses costs into their fixed and variable elements using the actual activity levels is referred to as:

A. Fixed Budgeting
B. Flexible Budgeting
C. Activity Based Budgeting
D. Zero Based Budgeting
E. Marginal Costing

 

Answer: B. Flexible Budgeting

Explanation: Flexible budgeting involves adjusting the budget to reflect actual activity levels, categorizing costs as either fixed or variable. Unlike fixed budgets, which remain static regardless of production levels, flexible budgets allow for a more accurate reflection of expenses based on actual operations. This makes it particularly useful in industries where costs fluctuate with changes in production or service activity.

  • 15 Marks

MA – July 2023 – L2 – Q2a – Budgetary control

This question involves preparing a statement to reconcile the budgeted contribution with the actual contribution using marginal costing principles and detailed variance analysis.

Bekwai manufactures and sells a single product. The company operates a standard marginal costing system and a just-in-time purchasing and production system. No inventory of raw materials or finished goods is held.

Details of the budget and actual data for the period are as follows:

Budget data:

Standard production cost per unit:
Direct material: 8kg @ GH¢10.80 per kg 86.40
Direct labour: 1.25 hours @ GH¢18.00 per hour 22.50
Variable overheads: 1.25 hours @ GH¢6.00 per hour 7.50

Standard selling price: GH¢180 per unit
Budgeted fixed production overheads: GH¢170,000
Budgeted production and sales: 10,000 units

Actual data:

  • Direct material: 74,000 kg @ GH¢11.20 per kg
  • Direct labour: 10,800 hours @ GH¢19.00 per hour
  • Variable overheads: GH¢70,000
  • Actual selling price: GH¢184 per unit
  • Actual fixed production overheads: GH¢168,000
  • Actual production and sales: 9,000 units

Required:
Using marginal costing principles, prepare a statement that reconciles the budgeted contribution and the actual contribution. (Your statement should show the variances in as much detail as possible).
(15 marks)

Actual Contribution Calculation:

Description Amount (GH¢)
Sales (9,000 units x GH¢184) 1,656,000
Less:
Direct Material (74,000 kg x GH¢11.20) 828,800
Direct Labour (10,800 hours x GH¢19.00) 205,200
Variable overheads 70,000
Total Cost (1,104,000)
Actual Contribution 552,000

Variance Analysis:

Variance Description Calculation Amount (GH¢)
Sales Price Variance (GH¢184 – GH¢180) x 9,000 units 36,000 F
Sales Volume Variance (10,000 units – 9,000 units) x GH¢63.60 63,600 A
Direct Material Price Variance (GH¢10.80 – GH¢11.20) x 74,000 kg 29,600 A
Direct Material Usage Variance (72,000 kg – 74,000 kg) x GH¢10.80 21,600 A
Direct Labour Rate Variance (GH¢18.00 – GH¢19.00) x 10,800 hours 10,800 A
Direct Labour Efficiency Variance (11,250 hours – 10,800 hours) x GH¢18.00 8,100 F
Variable Overhead Expenditure Variance (64,800 – 70,000) 5,200 A
Variable Overhead Efficiency Variance (11,250 hours – 10,800 hours) x GH¢6.00 2,700 F

Reconciliation Statement:
A statement reconciling the budgeted contribution to the actual contribution is as follows:

Description Amount (GH¢)
Budgeted Contribution 636,000
Less: Sales Volume Variance (63,600 A)
Add: Sales Price Variance 36,000 F
Less: Cost Variances (56,400 A)
Actual Contribution 552,000
  • Cost Variances (Net effect): GH¢10,800 (Favorable) – GH¢67,200 (Adverse) = GH¢56,400 Adverse.
    (15 marks)
  • 18 Marks

MA – Nov 2018 – L2 – Q3b – Relevant cost and revenue

Analysis of machine utilization, identification of bottlenecks, and comparison of marginal costing versus throughput accounting in a production setting.

KYC Ltd makes three products: Hand Chew (HC), Yogurt Swallow (YS), and Canned Lick (CL). All three products are sold as a package and so are offered for sale each month to be able to provide a complete market service. The products are fragile, and their quality deteriorates rapidly once they are manufactured. The products are produced on two types of machines and worked on by a single grade of direct labour. Five direct employees are paid GH¢8 per hour for a guaranteed minimum of 160 hours each per month. All of the products are first molded on machine type 1 and then finished and sealed on machine type 2. The machine hour requirements for each of the products are as follows:

Product Machine Type 1 (Hours/Unit) Machine Type 2 (Hours/Unit)
HC 1.5 1
YS 4.5 2.5
CL 3 2

The capacity of the available machines type 1 and 2 are 600 hours and 500 hours per month respectively. Details of the selling prices, unit costs, and monthly demand for the three products are as follows:

Product HC (GH¢/Unit) YS (GH¢/Unit) CL (GH¢/Unit)
Selling price 91 174 140
Component cost 22 19 16
Other direct material cost 23 11 14
Direct labour cost at GH¢8 per hour 6 48 36
Overheads 24 62 52
Profit 16 34 22

Maximum monthly demand (units):

  • HC: 120
  • YS: 70
  • CL: 60

Although KYC Ltd uses marginal costing and contribution analysis as the basis for its decision-making activities, profits are reported in the monthly management accounts using the absorption costing basis. Finished goods (inventories) are valued in the monthly management accounts at full absorption cost.

Required:

i) Calculate the machine utilization rate per month for each machine and explain which of the machines is the bottleneck/limiting factor. (4 marks)

ii) Using the current system of marginal costing and contribution analysis, calculate the profit-maximizing monthly output of the three products. (5 marks)

iii) Explain why throughput accounting might provide more relevant information in KYC’s circumstances. (4 marks)

iv) Using a throughput approach, calculate the throughput-maximizing monthly output of the three products. (5 marks)

i

𝐸𝑂𝑄 =

Relevant costs:

Holding costs =

Ordering costs =

ii)

Total cost with discount; purchase cost 8,000 @ 171= 1,368,000.
Ordering cost 8000÷8000 ×270= 270
Holding cost 8000÷2×24 = 96,000

The decision should be reject offer.

 

 

Machine type 1 has the highest utilisation rate and the rate is above 100%. Therefore
machine type 1 is the bottleneck/limiting factor.

Allocation of machine type 1 hours according to this ranking:

Product HC 120 units using 180 hours
Product CL 60 units using 180 hours
360 hours used
Product YS (240/4.5) 53 units using 240 hours
600 hours used

iii) Relevance of Throughput Accounting:

  • Throughput accounting focuses on maximizing the contribution per unit of the bottleneck resource (machine type 1 in this case), which is crucial for KYC Ltd because their products are perishable and need to be sold quickly. Labor costs, typically considered variable in marginal costing, are seen as fixed in throughput accounting, making this approach more suitable for KYC Ltd.

iv) Throughput-Maximizing Monthly Output:

Product HC YS CL
Throughput per unit (GH¢) 46 144 110
Machine type 1 hours/unit 1.5 4.5 3.0
Throughput per hour (GH¢) 30.67 32.00 36.76
Ranking (priority) 3 2 1
  • Allocation of Machine Type 1 Hours:
Product Units Produced Machine Hours Used
CL 60 180
YS 70 315
HC 70 105
  • 20 Marks

MA – Nov 2020 – L2 – Q1 – Budgetary Control

Prepare a financial analysis statement showing the current annual forecast of costs, revenues, and profits for the years 2019-2021 for a motor car manufacturer.

A motor car manufacturer has been specializing in the production and sale of Bedford model cars. The model is somewhat outmoded, and the current sales forecast indicates that the current (2018) sales level of 150,000 will be the same as in 2019 but will decline to 130,000 cars in 2020 and 110,000 cars in 2021. The company supplies according to orders received, and no stocks are held. Carbon monoxide emission regulations will prevent the model from being manufactured and sold after December 2021.

The company’s current estimates of the selling price and costs in 2019 are as follows:

Per car (GH¢) Amount (GH¢)
Selling Price 11,200
Production costs:
– Material and Labour (vary with production volume) 3,600
– Assembly 4,000
– Delivery 2,500
  • 75% and 40% of the assembly and delivery costs respectively are fixed, and the remainder vary with production volume.
  • In addition, the company estimates that it will incur the following non-production costs:
    • Marketing costs of GH¢60 million would be amortized on a straight-line basis over three years.
    • The Administration costs of GH¢10 million are fixed per annum.
    • The selling price, variable costs per car, and total fixed costs are expected to remain constant throughout the period from 2019 to 2021.

The company’s Managing Director is unhappy with the current annual profit forecasts for 2019–2021 based on the information above and believes that the company has the potential to increase the profit to a desired level of GH¢245 million in each of the years 2019 to 2021. The Managing Director has undertaken a strategic review and developed the following strategies to eliminate the gap:

Strategy 1: A marketing proposal will enable the company to enter a new overseas market with the result that the total (including the overseas market) sales level will be stabilized at 160,000 cars per annum from 2019 to 2021. The market entry costs will be GH¢30 million for each of the three years.

Strategy 2: A re-design of the car will enhance its sales appeal and will permit the company to increase its selling price to GH¢12,000. The re-design costs are GH¢30 million and are to be amortized over three years on a straight-line basis.

Strategy 3: A radical cost reduction program will improve efficiency and lower all variable costs by 20%. This will add GH¢70 million to the annual fixed overheads each year from 2019 to 2021.

Required:

a) Prepare a financial analysis statement showing the current annual forecast of costs, revenues, and profits for each of the years 2019 to 2021 and briefly comment on the figures. (Ignore the time value of money)

b) Calculate the profit gap for 2019, 2020, and 2021.

c) Estimate the profit in 2019 if:

i) Strategy 1 was implemented;
ii) Strategy 2 was implemented;
iii) Strategy 3 was implemented.

d) Evaluate which strategy to implement

 

Year 2019 2020 2021
Sales Units 150,000 130,000 110,000
Revenue (GH¢’million) 1680 1456 1232
Materials & Labour 540 468 396
Assembly 150 130 110
Delivery 225 195 165
Total Variable Cost 915 793 671
Contribution 765 663 561
Less: Fixed Costs 630 630 630
Profit 135 33 (69)

Comments:

  • The profit decreases significantly over the years, turning negative by 2021 due to declining sales volumes while fixed costs remain constant.
  • The company will need to consider implementing one or more of the proposed strategies to close the profit gap and achieve its desired profit levels.

b)

Year Desired Profit (GH¢’million) Actual Profit (GH¢’million) Profit Gap (GH¢’million)
2019 245 135 (110)
2020 245 33 (212)
2021 245 (69) (314)

 

c)

ategy Sales Units Revenue (GH¢’million) Materials & Labour (GH¢’million) Assembly (GH¢’million) Delivery (GH¢’million) Total Variable Cost (GH¢’million) Contribution (GH¢’million) Fixed Costs (GH¢’million) Profit (GH¢’million)
Original 150,000 1680 540 150 225 915 765 630 135
Strategy 1 160,000 1792 576 160 240 976 816 660 156
Strategy 2 150,000 1800 540 150 225 915 885 640 245
Strategy 3 150,000 1680 432 120 180 732 948 700 248

 

d)

Strategy 3 should be selected as it not only results in the highest profit compared to the original scenario and the other strategies, but it also closes the profit gap effectively.

  • 15 Marks

MA – May 2017 – L2 – Q3a – Standard costing and variance analysis

Calculate the budgeted fixed production overhead costs and prepare profit statements using marginal and absorption costing.

Bosco Ltd makes and sells one product. Currently, it uses absorption costing to measure profits and inventory values. The budgeted production cost per unit is as follows:

Item Cost (GH¢)
Direct labour (3 hours at GH¢6 per hour) 18
Direct materials (4 kilograms at GH¢7 per kilo) 28
Production Overhead (Fixed cost) 20
Total Cost per Unit 66

Normal output volume is 16,000 units per year, and this volume is used to establish the fixed overhead absorption rate for each year. Costs relating to sales, distribution, and administration are:

  • Variable: 20% of sales value
  • Fixed: GH¢180,000 per year

There were no units of finished goods inventory on 1st October 2015. The fixed overhead expenditure is spread evenly throughout the year. The selling price per unit is GH¢140. For the two six-monthly periods detailed below, the number of units to be produced and sold are budgeted as follows:

Period Production (units) Sales (units)
Six months ending 31st March 2016 8,500 7,000
Six months ending 30th September 2016 7,000 8,000

The entity is considering whether to abandon absorption costing and use marginal costing instead for profit reporting and inventory valuation.

Required:

i) Calculate the budgeted fixed production overhead costs for each of the six-monthly periods. (3 marks)

ii) Prepare profit statements for management using:

  • Marginal costing
  • Absorption costing

(9 marks)

iii) Prepare an explanatory statement reconciling the profits under marginal costing with those of absorption costing.

(3 marks)

i) Budgeted Fixed Production Overhead Costs:

The budgeted fixed production overhead expenditure is calculated based on the normal output volume.

  • Normal production volume: 16,000 units per year
  • Fixed production overhead rate per unit: GH¢20
  • Total annual overhead cost: 16,000 units × GH¢20 = GH¢320,000
  • Fixed overhead per six-month period: GH¢320,000 / 2 = GH¢160,000

(3 marks)

ii) Profit Statements Using Marginal and Absorption Costing:

Marginal Costing Profit Statement:

Description Six months ending 31 March 2016 (GH¢) Six months ending 30 September 2016 (GH¢)
Sales (7,000 units @ GH¢140) 980,000 1,120,000
Less: Marginal Cost of Sales (7,000 units @ GH¢74) 518,000 592,000
Contribution 462,000 528,000
Less: Fixed Production Overheads 160,000 160,000
Less: Other Fixed Costs (Sales, Distribution, Admin) 90,000 90,000
Profit 212,000 278,000

Absorption Costing Profit Statement:

Description Six months ending 31 March 2016 (GH¢) Six months ending 30 September 2016 (GH¢)
Sales (7,000 units @ GH¢140) 980,000 1,120,000
Less: Cost of Sales (using absorption)
– Direct Costs (7,000 units @ GH¢66) 462,000 528,000
– Fixed Overhead Absorbed (Production) 170,000 (8,500 units @ GH¢20) 140,000 (7,000 units @ GH¢20)
Less: Under/(Over) Absorbed Overheads 10,000 (over-absorbed) (20,000) (under-absorbed)
Cost of Sales 518,000 572,000
Gross Profit 462,000 548,000
Less: Fixed Costs (Sales, Distribution, Admin) 286,000 314,000
Profit 242,000 258,000

(9 marks)

iii) Reconciliation of Profits Under Marginal and Absorption Costing:

The differences in reported profits between marginal costing and absorption costing arise from the treatment of fixed production overheads and changes in inventory levels.

Period Difference
Six months ending 31 March 2016 Increase in inventory (1,500 units × GH¢20) = GH¢30,000
Six months ending 30 September 2016 Decrease in inventory (1,000 units × GH¢20) = (GH¢20,000)

Reconciliation:

  • 31 March 2016: Absorption costing profit higher by GH¢30,000
  • 30 September 2016: Absorption costing profit lower by GH¢20,000

(3 marks)

  • 20 Marks

MA – May 2016 – L2 – Q3 – Transfer Pricing, Divisional Performance, Relevant Cost and Revenue, Decision Making Techniques

Calculate profitability under different costing methods and evaluate an outsourcing offer, including additional decision factors.

Anim Shoes Ltd produces and sells Ghana-made shoes with two main departments: production/sales and repairs departments. The production and sales department produces and sells 10,000 pairs of shoes each year. Due to the low quality of raw materials available in the country, the company includes an additional GH¢11 in the cost of a pair of shoes sold to cater for one-year after-sales repairs. On average, it is expected that a quarter of the total pairs of shoes sold would come back for repairs a year after sale. Repair works on a pair of shoes take 2 labour hours, and it is estimated that total repair cost on the quarter of shoes will be GH¢27,500.

In addition to providing repair services to the production and sales department, the repair department sometimes picks up offers from outside the company. Such external offers are billed at full cost and a margin on sales of 20%. The following is the breakdown of the average repair cost of a pair of shoes:

Cost Item Cost (GH¢)
Material 2.50
Labour (1.5 per hour) 3.00
Variable Overheads 1.00
Fixed Overheads 2.30

Required:

i) Calculate the individual profits of the Production/Sales department, Repairs department, and Anim Ventures if repairs are done by the repairs department of Anim Ventures at either full cost plus 20% margin on sales or at marginal cost.
(8 marks)

ii) Pee Shoe Repairs has offered to repair each pair of shoes for Anim Ventures at GH¢10.00, a price which is cheaper than what the repairs department is offering. Should Anim Ventures accept this offer?
(5 marks)

iii) Identify THREE other factors Anim Ventures should consider in finalizing the decision in (ii) above.
(3 marks)

iv) Explain TWO principles of a good transfer pricing method.
(4 marks)

 

i) Profit Calculation:

  1. Full Cost plus 20% profit on sales:
Cost Item Production/Sales Dept (GH¢) Repairs Dept (GH¢) Anim Ventures (GH¢)
Sales 27,500 27,500 27,500
Cost 27,500 22,000 22,000
Profit 0 5,500 5,500
  1. Marginal Costing Method:
Cost Item Production/Sales Dept (GH¢) Repairs Dept (GH¢) Anim Ventures (GH¢)
Sales 27,500 16,250 27,500
Cost 16,250 22,000 22,000
Profit 11,250 (5,750) 5,500

ii) Should Anim Ventures accept Pee Shoe Repairs’ offer at GH¢10.00?

If Pee’s offer is accepted:

Cost Item Production/Sales Dept (GH¢) Repairs Dept (GH¢) Anim Ventures (GH¢)
Sales 27,500 0 27,500
Cost 25,000 5,750 30,750
Profit 2,500 (5,750) (3,250)

Decision:
No, Anim Ventures should not accept Pee Shoe Repairs’ offer because the entire organization would be worse off, with an overall loss of GH¢8,750 (GH¢5,500 + GH¢3,250).

iii) Additional Factors Anim Ventures Should Consider:

  1. Quality Standards: Pee Shoe Repairs’ ability to meet the quality standards required by Anim Ventures.
  2. Timely Delivery: The capability of Pee Shoe Repairs to provide timely after-sales repair services.
  3. Impact on In-House Repairs: Potential impact on the repairs department, including possible closure due to reduced workload and uncertain customer response if they discover the repair work is outsourced.

iv) Principles of a Good Transfer Pricing Method:

  1. Goal Congruence: The method should lead to optimal decisions for the entire organization, not just a specific division.
  2. Subunit Autonomy: If decentralization is favored, the transfer pricing method should support the autonomy of different subunits within the organization.

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