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Flashcards · YAC11 · A Level Topic 2.8

Marginal costing and absorption costing (A Level) flashcards

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Topic 2.8: Marginal costing and absorption costing

Marginal cost of a unit
Its variable production cost: direct materials + direct labour + direct expenses + variable production overhead.
Period cost vs product cost
Fixed production overhead is a period cost under marginal costing (written off in the period) and a product cost under absorption costing (carried forward in inventory).
Direct materials 7, direct labour 5, variable production overhead 2, fixed production overhead 4, variable selling cost 1. Inventory value per unit?
Marginal: 7 + 5 + 2 = 14. Absorption: 14 + 4 = 18. The selling cost is excluded from both.
Fixed overhead absorbed at 5 per unit. Inventory rises from 800 to 2,000 units. Marginal profit 31,000. Absorption profit?
Inventory rose by 1,200 units. 31,000 + 1,200 × 5 = 37,000.
Inventory falls from 1,000 to 400 units; fixed production overhead 6 per unit; absorption profit 52,000. Marginal profit?
Inventory fell, so marginal profit is higher by 600 × 6 = 3,600: 55,600.
Which costing method does IAS 2 require for inventory in published statements?
Absorption costing: fixed production overheads are included, allocated on normal capacity. Marginal costing is an internal tool.
Make or buy: marginal cost 8.70, absorbed fixed overhead 2.80, supplier price 10.20, no fixed costs saved. Decision?
Compare 8.70 with 10.20: make, saving 1.50 a unit. Comparing the full cost of 11.50 would wrongly say buy.
A product line has contribution 12,000 and is charged 15,000 of fixed costs, of which 4,000 would be saved. Effect of closing it?
Contribution lost 12,000, costs saved 4,000: profit falls by 8,000, so continue on financial grounds.
Labour is limited. K: contribution 20 using 4 hours. M: contribution 15 using 2 hours. Which first?
M: 7.50 per labour hour against 5 for K. Rank by contribution per unit of the limiting factor.
Budgeted fixed production overhead 60,000; normal output 15,000 units; actual output 13,500; actual overhead 60,000. Result?
Rate 4 per unit. Absorbed 54,000. Under-absorbed by 6,000, added to cost of sales.
Spare capacity: a customer offers 400 units at 16 each. Marginal cost 14; no extra fixed cost. Effect on profit?
400 × (16 − 14) = 800 extra profit, so accept on financial grounds. Then check the effect on regular customers' prices.

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