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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 – JULY 2023 – L1 – Q2 – Budgeting | Marginal Costing and Absorption Costing

Explain types of budgeting and prepare a flexible budget for cost control, including variance analysis.

a) Explain the following:
i) Incremental Budgeting (2 marks)
ii) Zero-Based Budgeting (2 marks)
iii) Activity-Based Budgeting (2 marks)

b) Cox Ltd is a manufacturing company that produces a body shaping drink for the African market. The company employs a marginal costing system as an integral part of its reporting systems. During the reporting period, there was no opening or closing inventory. The company produces its budgeted and actual results for December 31, 2022, as follows:

Budget Actual
Production/sales (units) 2,000 1,400
Sales (GH¢) 60,000 42,400
Variable Costs:
Direct material (GH¢) (20,000) (13,200)
Direct labour (GH¢) (10,000) (7,600)
Variable overhead (GH¢) (6,000) (4,400)
Contribution (GH¢) 24,000 17,200
Fixed cost (GH¢) (20,000) (20,800)
Net profit/loss (GH¢) 4,000 (3,600)

Required:
Prepare a budget that will be useful for management cost control purposes and briefly comment on the company’s performance in December 2022. (14 marks)

a)
i) Incremental Budgeting:
This is the system of budgeting where the previous period’s or year’s budget is used as a basis for preparing the current period’s budget by making incremental adjustments influenced by factors such as inflation, expansion needs, and growth. It is simple to apply in practice because you need not develop a decision package or justify the inclusion of the cost of an item into the budget. However, this method perpetuates past inefficiencies and does not lead to optimal and efficient allocation of budgetary resources. (2 marks)

ii) Zero-Based Budgeting:
This is a process of budgeting whereby all activities contained in the budget are re-evaluated each time the budget is prepared. Every item of expenditure must be justified in its entirety to be included in the next year’s budget. This approach adds a psychological impetus to employees to avoid wasteful expenditure, but it creates extra paperwork as the process of preparing the decision packages under Zero-Based Budgeting can be repetitive and cumbersome. (2 marks)

iii) Activity-Based Budgeting:
This is a method of budgeting based on an activity framework and the utilization of cost driver data in the budget-setting and variance feedback process. It involves defining activities that drive costs and using the level of activity to decide how much resource should be allocated and to determine how well an activity is being managed and to explain variances from the budget. While it helps managers to identify the cost of an activity and facilitate cost reduction, it can sometimes be difficult to trace objectively the cost of an activity to a product. (2 marks)

b)
Cox Limited – Cost Card

Cost Element Calculation GH¢
Selling price (GH¢60,000 / 2,000 units) 30
Direct material (GH¢20,000 / 2,000 units) 10
Direct labour (GH¢10,000 / 2,000 units) 5
Variable overhead (GH¢6,000 / 2,000 units) 3
Budgeted production cost 18
(2 marks)

Flexible Budget for the Month, 31 December 2022

Performance Area Fixed Budget Flexible Budget Actual Result Variance
Production/Sales 2,000 units 1,400 units 1,400 units
Sales (GH¢) 60,000 42,000 42,400 400F
Variable Costs:
Direct material (GH¢) 20,000 14,000 13,200 800F
Direct labour (GH¢) 10,000 7,000 7,600 600A
Variable overhead (GH¢) 6,000 4,200 4,400 200A
Total variable cost (GH¢) (36,000) (25,200) (25,200) 0.00
Contribution (GH¢) 24,000 16,800 17,200 400F
Fixed cost (GH¢) (20,000) (20,000) (20,800) 800A
Net profit/loss (GH¢) 4,000 (3,200) (3,600) 400A
(Marks are evenly spread for flexible budget and variance = 10 marks)

Commentary:
Sales variance was GH¢400F. This means that budgeted selling price is
(GH¢60,000/2,000units) GH¢30 and actual selling price is (GH¢42,400/1,400 units)
GH¢30.285. The overall performance is GH¢400 worse than budgeted. That is, the
flexible budget is GH¢3,200 compared with actual loss of GH¢3,600. Control of
direct material cost has been very good as this has been GH¢800 better than
expected. Direct labor cost is overspent as does fixed overhead by GH¢600 and
GH¢200 respectively.
(2 marks)

  • 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 – DEC 2022 – L1 – Q1 – Budgeting | Marginal Costing and Absorption Costing

Features of a service, calculation of overhead absorption rates and production cost, addressing negative cash balances, and preparation of a flexible budget.

a) Services are the non-physical, intangible parts of the Ghanaian economy, as opposed to goods, which we can touch or handle. Services, such as banking, education, medical treatment, and transportation make up a significant percentage of the economy.

Required: State and explain THREE (3) features of a service. (6 marks)

b) Edwin Ltd manufactures aviation components and parts to order, and the following are budgeted overheads for the year based on normal activity levels:

Department Budgeted overhead Labour hours
Welding GH¢12,000 3,000
Assembly GH¢20,000 2,000

Selling and administration overheads are 25% of factory cost.

An order for 350 units of engine parts, Job X 01, incurred the following cost:

  • Material cost: GH¢24,000
  • Labour:
    • Welding: 200 hours @ GH¢5 per hour
    • Assembly: 400 hours @ GH¢2 per hour
  • GH¢1,000 was paid for the hiring of a special x-ray machine for testing the welds.

Required: i) Calculate the overhead absorption rate for each department. (2 marks)

ii) Calculate the production cost for Job X01. (10 marks)

iii) Calculate the total cost of Job X01. (2 marks)

a) Features of a service:

  1. Simultaneity: Production and consumption of a service occur simultaneously, e.g., a haircut service is used immediately as provided.
  2. Heterogeneity: Services provided can vary from one provider to another, making each service unique despite its nature.
  3. Intangibility: Services cannot be touched or felt unlike physical goods, e.g., banking services.
  4. Perishability: Services cannot be stored for later use; they must be consumed when offered, e.g., a consultation. (3 points @ 2 marks each = 6 marks)

b) i) Overhead absorption rate:

  • Welding: GH¢12,000 / 3,000 hours = GH¢4 per hour
  • Assembly: GH¢20,000 / 2,000 hours = GH¢10 per hour (2 marks)

ii) Production cost for Job X01:

Cost Centre GH¢
Direct materials 24,000
Direct labour:
Welding: 200 hrs x GH¢5 1,000
Assembly: 400 hrs x GH¢2 800
Direct expenses 1,000
Prime cost 26,800
Production overheads:
Welding: 200 hrs x GH¢4 800
Assembly: 400 hrs x GH¢10 4,000
Total production cost 31,600
(10 marks)

iii) Total cost of Job X01:

Description GH¢
Production cost 31,600
Selling & administration (25% of factory cost) 7,900
Total cost 39,500
(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)
  • 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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