Question Tag: Variable Costs

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  • 1 Marks

MI – May 2016 – L1 – SA – Q4 – Cost-Volume-Profit (CVP) Analysis

Identify the conditions under which total contributions equal units sold multiplied by contribution per unit.

The formula which states that total contributions equal units of sales multiplied by contribution per unit is correct if the selling price:

A. And fixed cost are constant
B. And variable cost are constant
C. Varies and variable cost is constant
D. Varies and fixed cost is constant
E. And variable cost vary

Answer: B

Explanation:

The correct answer is B (And variable cost are constant). The formula for total contribution is given as:

Total Contribution =

This formula is valid only if the contribution per unit remains constant, which means that both the selling price and the variable cost per unit must remain unchanged. If either the selling price or the variable cost varies, the contribution per unit would change, making the formula invalid.

  • 12 Marks

MA – May 2018 – L2 – Q3a – Standard Costing and Variance Analysis

Prepare profit statements for April and May using standard costing and absorption costing methods.

a) Resol Ltd commenced trading on 1 April 2011 making the product Resol. The standard cost sheet for Resol is as follows:

The fixed production overhead figure has been calculated on the basis of a budgeted normal output of 24,000 units per annum. Fixed Sales and Administration costs are estimated at GH¢24,000 per annum. You may assume that all budgeted fixed expenses are incurred evenly over the year.

The sales price is GH¢35.00 and the actual number of units produced and sold was as follows:

April May
Production – units 2,000 2,500
Sales – units 1,500 3,000

Required:
Prepare a profit statement for each of the months April and May using:

  • Standard costing
  • Absorption costing

(i) Standard Costing Profit Statement

April May
Sales 52,500 105,000
Cost of Sales 7500
Opening Stock 30,000 37,500
Variable production cost (7,500)
Closing Stock 22,500 45,000
Contribution 30,000 60,000
Fixed production Overheads (10,000) (10,000)
Sales & Administration Overheads (2,000) (12,000)
Profit for period 18,000 48,000

(ii) Absorption Costing Profit Statement

April May
Sales 52,500 105,000
Cost of Sales
Opening Stock 0 10,000
Production cost (total) 40,000 50,000
Closing Stock (10,000) 0
Gross Profit 22,500 45,000
Sales & Administration Overheads (2,000) (2,000)
Over-absorbed fixed production overhead 0 (2,500)
Profit for period 20,500 45,500

Workings:

Calculation of Unit Costs

Cost Component GH¢
Direct Materials 8.00
Direct Labour 5.00
Variable Overhead 2.00
Variable Production Cost 15.00
Fixed Overhead 5.00
Total Production Cost 20.00

Closing Stock Calculations

Month Units Standard Costing Absorption Costing
April 500 GH¢7,500 GH¢10,000

Fixed Production Overhead

Calculation GH¢
Budgeted production (24,000 units) 120,000
Fixed overhead per month 10,000
Over absorption of fixed production overhead 2,500

Fixed Sales and Administration Cost

Calculation GH¢
Total annual cost 24,000
Monthly cost 2,000

 

  • 5 Marks

MA – May 2019 – L2 – Q2a – Cost-volume-profit (CVP) analysis

Determine the total variable cost per unit, total fixed overhead, and express the cost function based on given data.

Komosa Ltd is reviewing the selling price of its product for the coming year. A forecast of the annual costs that would be incurred by Komosa Ltd in respect of this product at differing activity levels is as follows:

Annual production (unit) 100,000 160,000 200,000
Direct materials (GH¢000) 200 320 400
Direct labour (GH¢000) 600 960 1,200
Overhead (GH¢000) 880 1,228 1,460

The cost behavior represented in the above forecast will apply for the whole range of output up to 300,000 units per annum of this product.

Required:
i) Calculate the total variable cost per unit and total fixed overhead. (4 marks)
ii) State the total cost function. (1 mark)

i) Total Variable Cost per Unit and Total Fixed Overhead:

  • Material Cost:
    GH¢ 200,000 / 100,000 units = GH¢ 2 per unit
  • Labour Cost:
    GH¢ 600,000 / 100,000 units = GH¢ 6 per unit
  • Variable overhead cost:
    Using high-low method:
    (GH¢ 1,460,000 – GH¢ 880,000) / (200,000 units – 100,000 units) = GH¢ 5.8 per unit
  • Total variable cost per unit:
    GH¢ 2 (materials) + GH¢ 6 (labour) + GH¢ 5.8 (overhead) = GH¢ 13.8 per unit
  • Fixed cost:
    Using the cost at 200,000 units:
    Total cost = GH¢ 1,460,000
    Variable cost = 200,000 units * GH¢ 13.8 = GH¢ 1,380,000
    Fixed cost = Total cost – Variable cost = GH¢ 1,460,000 – GH¢ 1,380,000 = GH¢ 300,000

(4 marks)

ii) Total Cost Function:

Total cost function: Y = GH¢ 300,000 + GH¢ 13.8x

  • 20 Marks

MA – Nov 2015 – L2 – Q3 – Decision making techniques | Relevant cost and revenue

Analyze whether to discontinue Double beds and whether to accept a new order for all bed sizes.

Obonku Limited produces Single, Double, and King-size beds for sale to hotels in West Africa. Its manufacturing plant is located in Tema and is currently operating at 100% capacity. Below is the annual output and sales for each product and the associated costs:

Product Single bed Double bed King Size bed
Units sold 5,000 units 3,500 units 4,000 units
Sales (GHS) 2,500,000 2,800,000 3,800,000
Costs:
Material cost 750,000 1,400,000 1,520,000
Labour costs 600,000 1,050,000 1,200,000
Manufacturing O’head 200,000 650,000 300,000
Administrative cost 200,000 100,000 200,000
Total cost 1,750,000 3,200,000 3,220,000
Profit/Loss 750,000 (400,000) 580,000

The Director of Obonku is of the view that the Double bed product line is not doing well and should not be produced any longer. The following additional information has been provided:

  1. 40% of the labor cost for all bed types are fixed costs.
  2. 50% of the manufacturing overhead is variable for all products.
  3. 80% of the administrative cost is fixed.

Alom Hotel Limited, situated in Elmina, has requested 80 units of each bed and is ready to procure them at the current prices. Obonku Ltd can only produce more if they increase production capacity in the short term at an additional cost of GHS 80,000.

Assuming that costs and prices remain the same, you are required to:

a) Advise whether the company should shut down the production of Double beds. (10 marks)
b) Should the company accept the new order assuming Double beds will still be produced? (10 marks)

a) Calculation of Contribution that Will Be Lost if Double Bed Production Ceases:

Item GHS
Potential loss of revenue 2,800,000
Less:
– Material cost savings 1,400,000
– Variable labor cost savings (60% of 1,050,000) 630,000
– Variable manufacturing overhead savings (50% of 650,000) 325,000
– Variable administrative cost savings (20% of 100,000) 20,000
Total potential savings 2,375,000
Potential contribution to fixed costs that will be lost 425,000

Conclusion:
A contribution of GHS 425,000 will be lost if Double bed production ceases. This loss in contribution will result in a decline in profit by the same amount since fixed costs will still be incurred. Therefore, the company should continue the production of Double beds.

 

ALTERNATIVELY

 

In this case profit reduced from GHC 930,000 to GHC 505,000 a reduction of GHC425, 000

 

b) Income Statement for 80 Units of Each Product:

Item Single bed Double bed King Size bed Total
Sales (GHS) 40,000 64,000 76,000 180,000
Material Cost 12,000 32,000 30,400 74,400
Labor Cost 5,760 14,400 14,400 34,560
Manufacturing O’head 1,600 7,428.57 3,000 12,028.57
Administrative Cost 640 457.14 800 1,897.14
Total Variable Cost 20,000 54,285.71 48,600 122,885.71
Contribution 20,000 9,714.29 27,400 57,114.29
Less Incremental Fixed Costs 80,000
Loss on Order 22,885.71

Conclusion:
The order should be rejected because it will result in an incremental loss of GHS 22,885.71 unless Alom Hotel Limited is willing to pay a higher price to cover the additional costs associated with producing the extra units.

  • 20 Marks

IMAC – MAR 2024 – L1 – Q1 – Cost and Cost Behaviour

Calculate total cost, unit cost, and profit per unit for a batch of 5,000 units and determine real fixed and variable costs after adjusting for inflation.

a) Atimbila Ltd manufactures a product that goes through various workshops. The following budgeted overheads for the year 2023, based on normal activity levels, have been provided:

Workshop Budgeted Overheads (GH¢) Overhead Absorption Base
Forming 360,000 30,000 labour hours
Machining 860,000 50,000 machine hours
Welding 400,000 36,000 labour hours
Assembly 300,000 20,000 labour hours

Selling and administrative overheads are 25% of factory cost.

An order for 5,000 units of the product (Batch 3391) incurred the following costs on 31 August 2023:

  • Materials: GH¢62,140
  • Labour:
    • 1,280 hours forming shop at GH¢10.50 per hour
    • 4,520 hours machining shop at GH¢11 per hour
    • 900 hours welding shop at GH¢10.50 per hour
    • 1,750 hours assembly shop at GH¢9.60 per hour
  • An amount of GH¢1,050 was paid for the hire of a special X-ray equipment for testing the welds. The time booking in the machine shop was 6,430 machine hours. Selling price was GH¢150 per product.

Required:
i) Compute the total cost of the batch. (10 marks)
ii) Calculate the unit cost per product. (1 mark)
iii) Determine the profit per product. (1 mark)

b) The following cost and production data relates to the operations of Mawuga Ltd over a two-year period:

Year Production (units) Total Costs (GH¢)
2022 50,000 1,700,000
2023 54,000 1,835,400

Between 2022 and 2023, there has been a 5% cost inflation.

Required:
i) Calculate the real fixed and variable costs. (6 marks)
ii) Estimate what the total costs will be in 2024 if it is expected that there will be 4% cost inflation and output will be 56,000 units. (2 marks)

 

  • 20 Marks

IMAC – NOV 2021 – L1 – Q3 – Cost and Cost Behaviour | Marginal Costing and Absorption Costing

Explanation of different cost classifications and advantages of marginal costing over absorption costing.

a) Costs may be classified in various ways according to their nature and the information needs of management.

Required:
Explain the following pairs of costs:
i) Direct and Indirect Costs (3 marks)
ii) Fixed and Variable Costs (3 marks)
iii) Controllable and Non-controllable Costs (3 marks)
iv) Production and Non-production Costs (3 marks)
v) Relevant and Irrelevant costs (3 marks)

b) QQQ Ltd has been reporting using an absorption costing technique. However, at a management retreat attended by the Cost and Management Accountant, they discussed the information usefulness of marginal costing reports for short-term decision making extensively.

Required:
Outline FIVE (5) advantages of a marginal costing system of reporting compared to absorption costing system for consideration by the management of QQQ Ltd. (5 marks)

 

a) i) Direct and Indirect Costs:

  • Direct costs can be directly identified with a specific cost unit or cost center. Examples include direct materials, direct labour, and direct expenses. The total of direct costs is known as the prime cost.
  • Indirect costs cannot be directly identified with a specific cost unit or cost center. Examples include indirect materials, indirect labour, and indirect expenses. The total of indirect costs is known as overheads.

ii) Fixed and Variable Costs:

  • Fixed costs are incurred for an accounting period and remain constant in total within certain activity levels.
  • Variable costs vary in total in direct proportion with the level of activity.

iii) Controllable and Non-controllable Costs:

  • Controllable costs can be influenced by a given level of managerial authority and are within the domain of that managerial authority and responsibility.
  • Non-controllable costs cannot be influenced by a given level of managerial authority and are usually determined by higher levels of managerial authority and shared among lower levels.

iv) Production and Non-production Costs:

  • Production costs relate to the manufacture of a product or the provision of a service and are included in the cost of sales. Examples include direct materials, direct labour, direct expenses, and production overheads.
  • Non-production costs are not directly associated with the production of the business’s output and are charged to the statement of profit or loss as expenses for the period they are incurred. Examples include administrative, selling, and finance costs.

v) Relevant and Irrelevant Costs:

  • Relevant costs make a difference in decision making, are generally incremental, futuristic in nature, and involve cash outlays.
  • Irrelevant costs do not vary with a given decision under consideration and do not impact the decision. They are usually sunk or past costs that have already been incurred or fixed costs that must be incurred regardless of the decision.

b) Advantages of marginal costing over absorption costing:

  1. It discourages stock build-up.
  2. There is no under or over absorption of overheads, and hence no adjustment is required in the statement of profit or loss.
  3. Fixed costs are treated as period costs and charged in full to the period under consideration.
  4. Marginal costing is useful in short-term decision-making processes.
  5. It is simple to operate.
  6. Separating costs into fixed and variable facilitates cost control. (Any 5 points @ 1 mark each = 5 marks)

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