Cost Behaviour
Blog 6
Sandy Hood
Example from December 2006
The following information relates to product R during the month of October 2006.
£
Units
Direct materials cost per unit
12.20
Direct labour cost per unit
27.80
Total variable overheads cost
20,000
Total fixed overheads cost
50,000
Number of units sold
800
Number of units produced
1,000
Note: There were no opening stocks.
Task 1.6
(a)
Calculate the cost per unit of product R under:
(i)
Variable (marginal) costing
Here it is very important that you read the question. Direct materials and direct
labour have been given on a per unit basis (the same basis as required in the
answer). Both overhead costs are given for the whole of production (1,000 units).
So in this case:
Variable (marginal) cost per unit is:£
Direct materials cost per unit
12.20
Direct labour cost per unit
27.80
Variable overhead cost per unit*
20.00
Variable (marginal) cost per unit
60.00
*workings
Total variable overheads cost
Number of units produced
(ii)
£20,000
1,000 units
= £20.00
Full absorption costing
This means the cost of a unit including the absorbed fixed overheads. So we can
take the marginal cost and add the fixed cost of one unit.
£
Variable (marginal) cost per unit
60.00
Fixed overhead cost per unit*
50.00
Full absorption cost per unit
110.00
*workings
Total fixed overheads cost
Number of units produced
£50,000
1,000 units
= £50.00
It is significant that recent exams have probed candidate understanding of the
differences in reported profit between full absorption and marginal (variable)
costing.
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Cost Behaviour
Blog 6
Sandy Hood
The previous example comes from the December 2006 exam, task 1.6 (a).
Recent exams (for example December 2009) have gone further and asked for profit and
loss accounts under each type of costing.
If we know the selling price of product R is £180 per unit we can produce profit and loss
accounts under each type of costing:
Marginal costing (MC)
£
£
Sales
Opening stock
Variable production costs
Closing stock
Cost of sales (MC basis)
Contribution
Fixed costs
Profit
As in the previous questions, I recommend adding a column (or two) as below:
£
per
unit units
Sales
180
£
£
800
144,000
Opening stock
Variable production
costs
60
1000 60,000
Closing stock
60
200 12,000
Cost of sales (MC basis)
60
800
48,000
120
800
96,000
Contribution
0 -
Fixed costs
50,000
Profit
46,000
By adding the unit column you are merely copying out figures calculated earlier and
adding a contribution per unit ~ in this case £120
I added the unit column so we can see a physical summary in terms of units.
12
Cost Behaviour
Blog 6
Sandy Hood
The alternative profit and loss account is under full absorption costing (FAC) principles.
£
£
Sales
Opening stock
Production costs
Closing stock
Cost of sales (FAC basis)
Profit
£
per
unit units
Sales
180
£
£
800
Opening stock
144,000
0 -
Production costs
110
1000 110,000
Closing stock
110
200 22,000
Cost of sales (FAC basis)
110
800
88,000
Profit
56,000
The two different approaches to costing have given two different profits. This difference
is entirely explained by the treatment of fixed overheads.
In the marginal costing method, fixed costs are all charged to the profit and loss as a cost
of the “accounting period”. No attempt is made to charge fixed costs to the product.
In the full absorption costing method, fixed costs are divided between the units produced
to give a product cost that includes all the variable costs of production and the fixed costs
on a unit basis.
I recommend that you attempt tasks 2.1 and 2.2 from the December 2009 exam.
CPL is considering what the effect would be of costing its products under marginal costing (MC)
principles, instead of under full absorption costing (FAC) principles that it currently follows.
The following information relates to one of the company’s products:
 Selling price per unit
£12
 Prime cost per unit
£4
 Variable production overhead cost per unit*
£3
 Budgeted fixed production overhead
£30,000 per month
 Budgeted production
15,000 units per month
 Budgeted sales
12,000 units per month
 Opening stock
2,000 units
*I added the word “overhead” to the original question (for clarity)
13
Cost Behaviour
Blog 6
Task 2.1 (14 minutes)
(a)
Calculate the contribution per unit (on a MC basis):
(b)
Calculate the profit per unit (on a FAC basis):
14
Sandy Hood