Activity 1 – Swifts Ltd
a) Calculate the absorption cost of producing each set:
Total costs per week:
£
Direct materials
30000
Direct labour
20000
Production overheads
5000
Total cost
55000
The absorption cost of producing one set is:
Total cost
=
55000 = £1100 per unit
Units of output
50
b) Calculate the total profit each week
£
Selling price (£1750 x 50)
87500
Less
Total cost
55000
equals
Profit for the week
32500
Activity 2 - Voles Vending
a) Calculate the absorption cost per coffee machine. Absorption
cost per coffee machine:
£
Direct materials
375
Direct labour
125
Fixed production overheads
(160000/5000) = 32
Absorption Cost
532
b) Prepare a statement of profit or loss (Income Statement) to
show the profit or loss is 5000 coffee machines are sold.
£
£
Sales revenue (5000 x 640)
3200000
Direct materials (5000 x 375)
1875000
Direct labour (5000 x 125)
625000
Fixed production overheads
160000
Total Cost
2660000
Profit
540000
Activity 3 - Wyvern Bike Company
a) Absorption cost of producing one bike:
Direct Materials
40
Direct Labour
50
Production o/heads (£5000/100 bikes)
50
Absorption cost per bike
140
b) Statement of profit or loss for 100 bikes:
£
Sales (£200 per bike)
Less: Direct Materials (£40 per bike)
Direct labour (£50 per bike)
Production overheads
£
20,000
4,000
5,000
5,000
Production overheads
Profit
Activity 4 – A Factory
Cost per unit:
a) Absorption costing:
Direct Materials
4.50
Direct Labour
7.85
Variable o/heads
1.60
Fixed o/heads (420,000/105,000) x 2 ½ hrs 10.00
Absorption cost per unit
23.95
Activity 5 - Voles Vending
Using the data from Question 1 page 4, you are required to calculate:
a) The marginal cost of producing one coffee machine
The marginal cost of producing an item/unit, is the sum of the variable costs per
item/unit.
£
Direct materials
375
Direct labour
125
Marginal cost of one coffee machine
500
b) The contribution per coffee machine
Contribution is calculated by:
Selling price per unit – variable costs per unit (marginal costs)
Selling price
Variable costs
Contribution
£640
£500
£140 per coffee machine
c) Prepare the profit statement using marginal costing for the proposed year’s
production and sales of coffee machines.
£
Sales
£
5000 x 640 = 3200000
Less Variable costs:
Direct materials
Direct labour
375 x 5000 = 1875000
125 x 5000 =625000
2500000
Contribution
700000
Less Fixed Costs
160000
Profit
540000
Activity 6 – Wyvern Bike Company
a) The Marginal Cost of producing one bike:
£
Direct Materials
40
Direct Labour
Marginal cost per unit
50
90 (variable costs)
b) The Contribution per bike:
Selling Price per bike
Less variable costs
200
90
Contribution
c) The weekly profit statement (using Marginal costing) for 100 bikes is:
£
£
Sales (£200 per bike)
Less: Direct Materials (£40 per bike)
Direct labour (£50 per bike)
20,000
4,000
5,000
9,000
Contribution
11,000
Less Fixed Costs (production o/heads)
5,000
Profit
6,000
Activity 7 - Return to activity 4
b) Marginal costing
Direct Materials
£4.50
Direct Labour
Variable o/heads
£7.85
£1.60
Marginal cost per unit
Activity 8 - Chairs Limited
Chairs Limited
Profit Statement for the year
ended 30 April 2014
Sales at £110 each
Variable costs
Direct Materials at £30 each
Direct labour at £40 each
Less Closing Stock (marginal cost)
500 chairs at £70 each (30 + 40)
Fixed production overheads
Less Closing stock (absorption
costing) (500 chairs x £90)
Less Cost of goods sold
PROFIT
£13.95
(b)
Reconciliation of profit
April 2014
Absorption costing profit
90,000
*Increase in stocks x Fixed Costs per unit
(10,000)
Marginal costing profit
80,000
*Increase in stock figure calculated by:
Opening stock
0
Units produced
5000
Less units sold
(4500)
Increase in stocks 500 x £20 Fixed Costs = £10,000
Fixed costs are calculated by: £100,000 FC / 5,000 chairs produced = £20 per
chair
Notes:
Closing stock is always calculated on the basis of this year’s costs:
Marginal costing: Variable costs only i.e. £30 + £40 = £70 per chair
Absorption costing: Variable and Fixed Costs i.e. £450,000 / 5,000 chairs =
£90 OAR per chairs – remember that fixed production overheads are
absorbed using this costing method!!
The difference in the profit figures is caused only by the closing stock
figures:
Closing stock £35,000 under marginal costing
[VC (DM £30 + DL £40) x 500 chairs = £35,000]
Closing stock £45,000 under absorption costing
[(VC (DM £30 + DL £40) + FC (£20)) x 500 chairs = £45,000]
The same costs have been used, but fixed production overheads have
been treated differently.
o With marginal costing, the full amount of the fixed production overheads
has been charged in this year’s profit statement
(£100,000); o With absorption costing, part of the fixed
production overheads (£20 OAR x 500 chairs = £10,000) has been
carried forward in the stock valuation
Activity 9 - MAXXA Limited
MAXXA Limited
Sales 3,000 units at £8 each
Variable costs:
Direct Materials at £1.25 each
Direct labour at £2.25 each
Less Closing Stock (marginal cost)
1,000 units at £3.50 each
Fixed production overheads
Less Closing stock (absorption cost)
1,000 units at £5 each
Less Cost of goods sold
PROFIT
Marginal Costing
Absorption Costing
£
£
£
24,000
5,000
9,000
14,000
5,000
9,000
3,500
10,500
6,000
6,000
20,000
5,000
16,500
7,500
Profit Statement for the month ended 31 May 2014
£
24,000
15,000
9,000
Reconciliation of profit
31 May 2014
Absorption costing profit
9,000
*Increase in stocks x Fixed Costs per unit
(1,500)
Marginal costing profit
7,500
*Increase in stock figure calculated by:
Opening stock
0
Units produced
4,000
Less units sold
(3,000)
Increase in stocks 1,000
x £1.50 Fixed Costs = £1,500
Fixed costs are calculated by: £6,000 FC / 4,000 units produced = £1.50 per
unit
Notes:
Closing stock is calculated on the basis of this year’s costs:
Marginal costing: Variable costs only i.e. £1.25 + £2.25 = £3.50 per unit
Absorption costing: Variable and fixed costs
i.e. £20,000 / 4,000 units = £5 per unit
The difference in the profit is caused only by the closing stock figures:
£3,500 under marginal costing, and £5,000 under absorption costing.
With marginal costing, the full amount of the fixed production overheads
has been charged in this year’s profit statement; by contrast, with
absorption costing, part of the fixed production overheads has been
carried forward in the stock valuation.
Activity 10 - Product M
Cost per unit:
a) Absorption costing:
£
Direct materials
12.20
Direct labour
8.00
Variable overhead
1.25
Prime cost
21.45
Plus fixed overheads (126000/60000 =OAR x 3hrs)
6.30
Absorption cost
27.75
b) Marginal costing:
£
Direct materials
12.20
Direct labour
8.00
Variable overhead
1.25
Prime cost or marginal cost
21.45
Activity 11 - Product P
Cost per unit:
a) Absorption costing:
£
Direct materials
16.00
Direct labour
21.00
Variable overhead
4.20
Prime cost
41.20
Plus fixed overheads (184275/81900 =OAR x 2hrs)
4.50
Absorption cost
45.70
b) Marginal costing:
£
Direct materials
16.00
Direct labour
21.00
Variable overhead
4.20
Prime cost or marginal cost
41.20
Activity 12 - Product J
First you need to calculate the marginal and absorption cost per unit, as you
need these figures to calculate inventory figures.:
£
Direct materials
8.50
Direct labour
30.00
Variable overhead (96000/(3x20000)) x 3hrs
4.80
Prime cost or marginal cost per unit
43.30
Plus fixed overheads (210000/60000)= 3.50 OAR x 3hrs)
10.50
Absorption cost per unit
53.80
Prepare the budgeted statement of profit or loss for November using: a)
Absorption costing
£
Sales
£
£110 x 18000 units =
1980000
Less cost of sales:
Opening inventory
Production cost
1500 units x £53.80 =
80700
20000 units x £53.80 =
1076000
1156700
Less closing inventory
1500+20000-18000 =
3500 units x £53.80 =
(188300)
(968400)
Profit
1011600
b) Marginal costing
£
Sales
£
1980000
Less cost of sales:
Opening inventory
1500 units x £43.30 =
64950
Production cost
20000 units x £43.30 =
866000
930950
Less closing inventory
3500 units x £43.30 =
(151550)
(779400)
Contribution
1200600
Less Fixed overheads
(210000)
Profit
990600