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  • 20 Marks

IMAC – NOV 2023 – L1 – Q1 – Marginal Costing and Absorption Costing

Prepare profit statements for January and February 2023 using marginal costing and absorption costing methods.

Alokome Plc is a company that produces and sells one product “Iga”. Information relating to the operations of Alokome Plc for the first two months of 2023 is as follows:

i) Iga sells for GH₵500 per unit.
ii) There were no inventories of Iga at the end of December 2022.
iii) Other relevant information is as follows:

Cost Element GH₵
Direct material and wages 220
Variable production overhead 30

Budgeted and actual costs per month:

Cost Element GH₵
Fixed production overhead 990,000
Fixed selling and administrative expenses 400,000
Variable selling expenses 12.5% of sales

Normal capacity: 110,000 units per month

Number of units produced and sold:

Month Sales (units) Production (units)
January 128,000 140,000
February 110,000 102,000

Required:
Using the information above, prepare in a columnar form profit statements for January and February 2023 using:
a) Marginal costing (10 marks)
b) Absorption costing (10 marks)

a) Alokome Plc – Profit Statement for January and February 2023 (Marginal Costing)

January (GH₵’000) February (GH₵’000)
Sales revenue 64,000 55,000
Less: Variable cost of sales:
Beginning inventory – 3,000
Production cost 35,000 25,500
Ending inventory (3,000) (1,000)
Variable cost of production 32,000 27,500
Variable selling expenses 8,000 6,875
Variable cost of sales (40,000) (34,375)
Contribution 24,000 20,625
Less: Fixed costs
Fixed production overhead (990) (990)
Fixed selling and admin. expenses (400) (400)
Profit 22,610 19,235
(Marks are evenly spread using ticks = 10 marks)

b) Alokome Plc – Profit Statement for January and February 2023 (Absorption Costing)

January (GH₵’000) February (GH₵’000)
Sales revenue 64,000 55,000
Less: Full cost of sales:
Beginning inventory – 3,108
Production cost 36,260 26,418
Ending inventory (3,108) (1,036)
Full cost of production 33,152 28,490
Gross profit (Notional) 30,848 26,510
Adjustment for under/over absorption of fixed prodn o/head 270 (72)
Gross profit (Actual) 31,118 26,438
Less: Selling and administrative expenses:
Variable selling expenses (8,000) (6,875)
Fixed selling and admin. expenses (400) (400)
Profit 22,718 19,163
(Marks are evenly spread using ticks = 10 marks)

Workings:

Calculation GH₵
Variable production cost per unit
Direct material and wages 220
Variable production overhead 30
Total 250
Calculation GH₵
Fixed production overhead per unit 9
Full production cost per unit
Direct material and wages 220
Variable production overhead 30
Fixed production overhead per unit 9
Total 259
  • 20 Marks

IMAC – MAR 2023 – L1 – Q3 – Marginal Costing and Absorption Costing | Scope of Management Accounting

Explain qualities of management accounting information, and differences between marginal and absorption costing.

a) Management accounting systems obtain information from both internal and external sources. Cost accounting system is one major source of management accounting information, and such information is only useful to managers if it possesses certain qualities.

Required:
In reference to the statement above, explain FIVE (5) qualities of management accounting information.
(10 marks)

b) Explain the following briefly:
i) Cost center (2.5 marks)
ii) Profit center (2.5 marks)

c) Explain TWO (2) differences between a marginal costing system and an absorption costing system.
(5 marks)

a)
Qualities of cost and management information:

  1. Relevance: Information should be timely and bear on the decision-making process by possessing predictive or confirmatory (feedback) value.
  2. Faithful representation: Information must be honestly presented, complete, neutral, and free from material error and misstatement.
  3. Comparability: Even though different companies may use different accounting methods, there is still sufficient basis for valid comparison.
  4. Consistency: Deviations in measured outcomes from period to period should be the result of deviations in underlying performance (not accounting quirks).
  5. Verifiability: Different knowledgeable and independent observers reach similar conclusions.
  6. Timeliness: Cost and revenue information not readily available to the organization at the right time for decision making is of no use. Information must flow to the decision maker at the right time and at the right place so that it can be of use to the decision maker.
    (Any 5 points @ 2 marks each = 10 marks)

b)
i) Cost center: This is a segment of the organization that has the authority to incur and control cost. Expense center is a responsibility center incurring only expense items and producing no direct revenue from the sale of goods or services. An example of expense centers are service centers, thus the maintenance department and accounting department of an organization. (2.5 marks)

ii) Profit center: Profit center is a responsibility center having both revenues and expenses objectives because segmental earnings equal segmental revenues minus related expenses; therefore, the manager must be able to control both of these categories of revenue and cost. (2.5 marks)

c)
The following are the major differences between marginal costing and absorption costing:

  1. Cost Inclusion: Marginal Costing apportions only variable costs to the products, while Absorption Costing absorbs both fixed and variable costs into the product cost.
  2. Profit Calculation: Marginal costing profit is calculated using the Contribution Margin (Sales – Variable Costs), whereas Absorption Costing calculates profit after deducting both fixed and variable costs from sales.
  3. Overhead Treatment: Marginal Costing treats fixed overheads as period costs, charged against revenue in the period incurred, while Absorption Costing includes fixed overheads in the product cost.
  4. Stock Valuation: Under Marginal Costing, stock is valued at variable cost, whereas under Absorption Costing, stock is valued at full cost (including fixed overheads).
  5. Presentation of Profit: Marginal Costing profit varies directly with sales volume, while Absorption Costing profit can vary with changes in stock levels due to fixed overheads absorption.
    (Any 2 points @ 2.5 marks each = 5 marks)
    (Total: 20 marks)
  • 20 Marks

IMAC – MAY 2021 – L1 – Q1 – Marginal Costing and Absorption Costing

Prepare profit and loss statements for QQQ Ltd using marginal and absorption costing techniques.

The following data has been extracted from the operating records of QQQ Ltd for the last two quarters of the year to 31 December 2020:

Quarter 3 4
Production units 7,000 8,500
Sales units 5,500 9,500
Description Amount (GH¢)
Selling price per unit 100
Direct material cost per unit 20
Direct labour cost per unit 15
Variable overheads per unit 10
  • Fixed production overheads are budgeted at GH¢120,000 for a budgeted production of 8,000 units per quarter. These overheads are absorbed on a per unit of production basis.
  • Non-production overheads comprised:
    • Fixed administration expenses GH¢40,000 per quarter
    • Selling and distribution expenses 10% of sales

Required:
a) Prepare a statement of profit or loss for each quarter using the Marginal Costing technique. (10 marks)

b) Prepare a statement of profit or loss for each quarter using the Absorption Costing technique. (10 marks)

a) Marginal Costing Statement of Profit or Loss for the two Quarters to 31st December 2020

Quarter 3 4
GH¢ GH¢
Sales (W1) 550,000 950,000
Variable cost of goods sold:
Opening Inventory – (67,500)
Production (W2) 315,000 382,500
Closing Inventory (67,500) (22,500)
Total Variable Production Cost 247,500 427,500
Non-Production Cost:
Selling & Dist. Cost 55,000 95,000
Total Variable Cost (302,500) (522,500)
Contribution 247,500 427,500
Fixed Costs:
Production 120,000 120,000
Non-production 40,000 40,000
Total Fixed Costs (160,000) (160,000)
Net profit 87,500 267,500

b) Absorption Costing Statement of Profit or Loss for the two Quarters to 31st December 2020

Quarter 3 4
GH¢ GH¢
Sales 550,000 950,000
Cost of Sales:
Opening Inventory – (90,000)
Production 420,000 510,000
Closing Inventory (90,000) (30,000)
Total Cost of Sales 330,000 570,000
Gross Profit 220,000 380,000
Expense:
Selling & Dist. 55,000 95,000
Admin. Expenses 40,000 40,000
Total Expenses (95,000) (135,000)
Over / (Under) Absorption (15,000) 7,500
Net Profit 110,000 252,500

Workings:

  • Computation of Product Cost/unit
    • Marginal Costing
      • Direct Material Costs: GH¢20
      • Direct Labour: GH¢15
      • Variable Overheads: GH¢10
      • Total Product cost/unit: GH¢45
    • Absorption Costing
      • Direct Material Costs: GH¢20
      • Direct Labour: GH¢15
      • Variable Overheads: GH¢10
      • Fixed Overheads: GH¢15
      • Total Product cost/unit: GH¢60
  • 20 Marks

IMAC – MAY 2020 – L1 – Q1 – Marginal Costing and Absorption Costing

Prepare profit or loss statements using marginal and absorption costing for Smooth Sailing Ltd.

Additional information:
Fixed production overheads are budgeted to be GH¢40,000 per month for a budgeted monthly
production of 20,000 units. Production overheads are absorbed on a unit of production basis.
Required:
a) Using marginal costing principles, prepare a statement of profit or loss for the THREE (3)
months to September 2019. (10 marks)
b) Using absorption costing principles, prepare a statement of profit or loss for the THREE (3)
months to September 2019. (10 marks)

 

Workings (W):
W1. Computation of product cost per unit

Marginal Costing Absorption Costing
Direct material GH¢14 GH¢14
Direct labour GH¢4 GH¢4
Variable overheads GH¢2 GH¢2
Fixed overheads (W2) – GH¢2
Total cost per unit GH¢20 GH¢22

W3. Over/ (Under) Absorption

Month July August September
GH¢’000 GH¢’000 GH¢’000
Overheads absorbed 30,000 32,000 24,000
Overheads incurred 40,000 40,000 40,000
Over/(under) absorption (10,000) (8,000) (16,000)
(All marks evenly spread for 10 marks using ticks)

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