Edexcel A-Level Accounting: Marginal costing and absorption costing (YAC11) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions test topic 2.8 from the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018: outcomes 2.8.1 to 2.8.6, Unit 2 (A2) only. Every business is fictional and all amounts are in dollars.

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Questions

1. Explain how fixed production overheads are treated under marginal costing and under absorption costing. [2]

2. Askerby Ltd makes one product. Per unit: direct materials 11.20, direct labour 8.40, variable production overhead 3.10 and variable selling cost 0.90. Budgeted fixed production overheads are 117,000 and normal output is 9,000 units.

(a) Calculate the marginal production cost per unit. [1] (b) Calculate the absorption cost per unit. [2] (c) Value closing inventory of 750 units under each method. [2]

3. State two advantages of marginal costing and two advantages of absorption costing. [4]

4. Gwennap Foods Ltd sells cases of sauce at 18.00. Variable production cost is 7.50 a case. Fixed production overheads were 72,000, as budgeted, and are absorbed on normal output of 24,000 cases. Variable selling costs are 0.50 per case sold and fixed administration costs are 41,000. This year 24,000 cases were made and 21,000 sold. There was no opening inventory.

Prepare profit statements using (i) marginal costing and (ii) absorption costing, and reconcile the two profits. [12]

5. Lanreath Ltd’s opening inventory was 2,400 units and its closing inventory 900 units. Fixed production overhead is absorbed at 4.50 per unit in both years. Marginal costing profit is 63,200. Calculate the absorption costing profit and explain why it differs. [3]

6. Kelynack Print sells books at 9.00. Per book: materials 3.10, labour 1.60, variable overhead 0.50 and fixed overhead absorbed 2.30. There is spare capacity for 6,000 books. A charity offers to buy 5,000 books at 6.40 each; a one-off artwork set-up of 1,800 would be needed.

(a) Calculate the effect of the order on profit. [3] (b) Evaluate whether Kelynack Print should accept the order. [4]

7. Penwithick Ltd makes 15,000 valves a year: materials 4.60, labour 3.80, variable overhead 1.20 and fixed overhead absorbed 2.90 per valve. A supplier offers valves at 11.20. If Penwithick buys, it can cancel a machine lease of 9,000 a year and sublet the freed floor space for 6,500 a year. Other fixed overheads continue.

(a) Calculate the relevant cost of making and of buying, and advise the directors. [6] (b) State two non-financial factors the directors should consider. [2]

8. Carnkie Leisure runs three services. Fixed costs are apportioned by floor area.

	Classes	Swim	Spa	Total
Revenue	96,000	132,000	54,000	282,000
Variable costs	28,800	52,800	32,400	114,000
Fixed costs apportioned	48,000	72,000	30,000	150,000

If the Spa closes, 11,400 of its fixed costs would be saved.

(a) Calculate the effect on total profit of closing the Spa. [4] (b) A physiotherapist offers to rent the Spa area for 13,000 a year if it closes. Calculate the revised effect on total profit. [2] (c) Recommend a course of action, with one non-financial factor. [2]

9. Treverbyn Ltd has 13,900 machine hours available next year. Fixed costs are 61,000.

Product	Price	Variable cost	Machine hours per unit	Maximum demand
X	48	30	3	1,800
Y	65	37	4	1,500
Z	39	24	2	2,000

(a) Show that machine hours are a limiting factor. [2] (b) Calculate the production plan that maximises profit. [6] (c) Calculate the maximum profit. [2]

10. Faversley Ltd’s production manager earns a bonus based on absorption costing profit. This year 30,000 units were made and 22,000 sold, with no opening inventory. Fixed production overheads of 150,000 are absorbed on normal output of 30,000 units.

(a) Calculate the fixed production overhead carried forward in closing inventory. [2] (b) Explain why the bonus scheme may lead to poor decisions, and suggest a change. [4]

11. Inchmery Ltd makes one product: price 62, materials 20, labour 2 hours at 12 an hour, and variable overhead 4. Labour hours are fully used. A customer offers 15,800 for a special job needing materials of 5,300, 600 labour hours and variable overhead of 900.

(a) Calculate the contribution from the special job. [3] (b) Calculate the contribution lost on normal production. [2] (c) Advise whether to accept, on financial grounds. [2] (d) Evaluate one other factor and explain how the advice would change if spare labour hours were available. [3]

Answers

1. Marginal costing: all fixed production overhead is a period cost, written off in full against the period’s profit [1]. Absorption costing: it is absorbed into each unit’s cost, so a share is carried forward in closing inventory [1]. [2] Examiner insight: each method needs its own point; describing absorption costing alone answers only half the question.

2. (a) 11.20 + 8.40 + 3.10 = 22.70 [1] (b) 117,000 ÷ 9,000 = 13.00 per unit [1]; 22.70 + 13.00 = 35.70 [1] (c) Marginal: 750 × 22.70 = 17,025 [1]. Absorption: 750 × 35.70 = 26,775 [1]. Examiner insight: the 0.90 selling cost is not a production cost; including it in either unit cost makes the inventory values wrong too.

3. Marginal: building up inventory cannot raise profit [1]; contribution aids short-term decisions [1]. Absorption: complies with IAS 2 [1]; full cost helps set prices that cover all costs [1]. [4] Examiner insight: “it is easier” earns nothing; say what the method does better.

4. (i) Marginal costing

	Detail	Total
Revenue (21,000 × 18.00)		378,000 [1]
Variable cost of production (24,000 × 7.50)	180,000
Less closing inventory (3,000 × 7.50)	(22,500)
Variable cost of sales		(157,500) [1]
Variable selling costs (21,000 × 0.50)		(10,500) [1]
Contribution		210,000 [1]
Fixed production overheads 72,000 + fixed administration 41,000		(113,000) [1]
Profit for the year		97,000 [1]

(ii) Absorption costing (rate 72,000 ÷ 24,000 = 3.00, full cost 10.50)

	Detail	Total
Revenue		378,000
Cost of production (24,000 × 10.50)	252,000 [1]
Less closing inventory (3,000 × 10.50)	(31,500) [1]
Cost of sales		(220,500)
Gross profit		157,500 [1]
Variable selling 10,500 + fixed administration 41,000		(51,500) [1]
Profit for the year		106,000 [1]

Reconciliation: inventory rose by 3,000 cases × 3.00 = 9,000, so absorption profit is higher by 9,000 [1]. [12] Examiner insight: output equals normal output, so there is no under- or over-absorption to adjust.

5. Inventory fell by 2,400 − 900 = 1,500 units [1]. Absorption profit = 63,200 − (1,500 × 4.50) = 56,450 [1]. It is lower because 6,750 of fixed overhead brought forward in inventory is charged this year [1]. [3] Examiner insight: state the direction before calculating; adding 6,750 instead of subtracting it makes the profit and the explanation wrong.

6. (a) Marginal cost = 3.10 + 1.60 + 0.50 = 5.20 [1]. Contribution = 5,000 × (6.40 − 5.20) = 6,000 [1]. Less set-up 1,800: profit rises by 4,200 [1]. (b) The order adds 4,200 within spare capacity, so accept on financial grounds [1]. The price is below full cost (7.50), but normal sales cover fixed overhead [1]. However, regular customers may demand similar prices [1]. On balance, accept if it is clearly a one-off [1]. Examiner insight: “evaluate” needs a judgement; a list of factors with no decision falls short.

7. (a) Marginal cost = 4.60 + 3.80 + 1.20 = 9.60 [1]; 15,000 × 9.60 = 144,000 [1]. Add lease avoided by buying 9,000 [1] and lost sublet income 6,500 [1]: relevant cost of making = 159,500. Buying = 15,000 × 11.20 = 168,000 [1]. Making is cheaper by 8,500, so keep making [1]. (b) Any two: supplier’s quality and reliability [1]; loss of control over delivery times, jobs or skills [1]. Examiner insight: the 2.90 absorbed overhead is irrelevant; using full cost of 12.50 reverses the decision.

8. (a) Spa contribution = 54,000 − 32,400 = 21,600 lost [1]. Fixed costs saved 11,400 [1]. Profit falls by 10,200 [1], from 18,000 to 7,800 [1]. (b) −10,200 + 13,000 rent = profit rises by 2,800 [1], to 20,800 [1]. (c) Close the Spa and let the area: profit rises by 2,800 [1]. But Swim members may leave if spa access goes [1]. Examiner insight: show the 18,000 starting profit (contribution 168,000 less fixed costs 150,000) rather than assume it.

9. (a) Hours needed: X 5,400 + Y 6,000 + Z 4,000 = 15,400 [1], more than the 13,900 available [1]. (b) Contribution per hour: X 18 ÷ 3 = 6.00 [1]; Y 28 ÷ 4 = 7.00 [1]; Z 15 ÷ 2 = 7.50 [1]. Rank Z, Y, X [1]. Make 2,000 Z (4,000 hours) and 1,500 Y (6,000 hours) [1], then 3,900 ÷ 3 = 1,300 X [1]. (c) Contribution: 30,000 + 42,000 + 23,400 = 95,400 [1]. Profit = 95,400 − 61,000 = 34,400 [1]. Examiner insight: Y has the highest contribution per unit but ranks second; ranking by unit contribution gives a wrong plan.

10. (a) 150,000 ÷ 30,000 = 5.00 per unit [1]; 8,000 units × 5.00 = 40,000 [1]. (b) Producing more than is sold raises absorption profit, because fixed overhead is carried forward [1]. So the manager could raise the bonus by overproducing [1]. This ties up cash and adds storage costs and obsolescence risk [1]. A bonus based on marginal costing profit, which follows sales, removes the incentive [1]. Examiner insight: link the explanation to the 8,000 unsold units; a general definition earns little.

11. (a) Labour 600 × 12 = 7,200 [1]. Variable costs 5,300 + 7,200 + 900 = 13,400 [1]. Contribution 15,800 − 13,400 = 2,400 [1]. (b) Normal contribution = 62 − 20 − 24 − 4 = 14 per unit [1]; 600 ÷ 2 = 300 units lost × 14 = 4,200 [1]. (c) Net effect 2,400 − 4,200 = (1,800) [1], so refuse [1]. (d) The job may win future orders, which could justify a small loss [1]. With spare hours, no normal output is lost [1], so the job adds 2,400: accept [1]. Examiner insight: labour is the limiting factor, so the lost contribution must appear in the answer.

Where marks are usually lost

• Putting variable selling costs into unit inventory cost (question 2).
• Placing fixed production overheads above contribution in a marginal statement.
• Adding an under-absorption when output equals normal output, or missing one when it does not.
• Reconciling profits in the wrong direction when inventory falls.
• Using full cost per unit in special-order and make-or-buy decisions.
• Treating all apportioned fixed costs as saved on closure.
• Ending an “evaluate” or “advise” answer without a clear recommendation.

Next steps

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Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018 (first teaching September 2015), Pearson Education Limited. Unit 2: Corporate and Management Accounting, topic 2.8 Marginal costing and absorption costing.