MAF 451 COSTS AND MANAGEMENT ACCOUNTING

TUTORIAL 5: ABSORPTION COSTING AND MARGINAL COSTING

QUESTION 1 [MAF451 DEC 2019]

Atifah Layer Cake Enterprise specializes in producing Honey Layer Cake. The company sells
the cakes in the north region of Malaysia.

The information below relates to the variable production cost of making a kilogram of the cake.
RM
Direct material 20
Direct labour 5
Variable Production Overhead 2

Additional information:

1. Fixed production overhead is absorbed based on number of cakes produced. It is

estimated that 60,000 units of cakes will be produced in a year and budgeted fixed
production overhead is RM180,000 per annum.

2. Fixed administration overhead is RM60,000 per year and variable selling overhead is RM2
per unit of cake sold.

3. Each unit of cake could be sold at a selling price of RM45.

4. The number of unsold cakes at the end of November 2019 is 100 units. During December
2019, the numbers of cakes produced and sold were 5,500 units and 5,200 units
respectively.

5. The actual fixed production overhead and fixed administration overhead are assumed
same as budgeted.

Required:

a. Prepare the profit Statement for the month of December 2019, using Marginal Costing
Approach and Absorption Costing Approach.
(13 marks)

b. Explain briefly two (2) advantages of using Marginal Costing Approach in preparing
income statement.
(2 marks)
(Total: 15 marks)

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SOLUTION 1
a. i) Product cost per unit:
MC (RM) AC (RM)
Direct Material 20 20
Direct labour 5 5
VPOH 2 2
FPOH 3
27 30

ii) Marginal Costing Approach Profit Statement for the Month of Dec 2019
RM RM
Sales (RM45 x 5,200) 234,000
(-) Variable COGS:
Opening Stock (100 x RM27) 2,700
(+) Production (5,500 x RM27) 148,500
(-) Closing Stock (400 x RM27) (10,800) (140,400)
Gross Margin 93,600
(-) Other VC - selling (RM2 x 5,200) (10,400)
Contribution Margin 83,200
(-) Fixed costs: Production (RM180,000 ÷ 12) (15,000)
Admin (RM60,000 ÷ 12) (5,000)
Net profit 63,200

Absorption Costing Approach Profit Statement for the Month of Dec 2019
RM RM
Sales (RM45 x 5,200) 234,000
(-) COGS:
Opening Stock (100 x RM30) 3,000
(+) Production (5,500 x RM30) 165,000
(-) Closing stock (400 x RM30) (12,000) (156,000)
Gross profit 78,000
(-) variable selling OH (RM2 x 5,200) (10,400)
Fixed Admin (RM60,000 ÷ 12) (5,000)
Unadjusted net profit 62,600
+ Over Absorbed (W1) 1,500
Adjusted net profit 64,100

(W1): OAR fixed admin = 180,000 ÷ 60,000 = 3

OH incurred (RM180,000 ÷ 12) RM15,000

(-) OH absorbed (5,500 x RM3) RM16,500
Over absorbed RM1,500

b. Advantages of MC approach:
a. Separation of fixed and variable costs helps to provide relevant information
about costs for making production decisions. Relevant costs are required for
variety of short-term decisions.
b. MC approach avoids fixed production overhead being capitalized in unsold
stocks.

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QUESTION 2 [MAF451 JUNE 2019]

Waja Sari Berhad is a manufacturer of steel products which are used as raw materials for heavy
industries. One of the products that the company produces is Bigsteel. The production of one
unit of Bigsteel requires 2 kilogram of raw materials at a cost of RM11.50 per kilogram and 2
hours of direct labour at RM6 per hour. The selling price per unit of Bigsteel is RM150.00. The
company’s production overhead costs consist of the following:

Fixed production overhead RM18 per unit

Variable production overhead RM10 per unit

The budgeted annual production of Bigsteel for the year 2019 is 94,200 units. Variable selling
cost is 8% of sales.

Other annual fixed costs of the company are as follows:

RM
General administration costs 2,160,000
Marketing and promotion costs 1,080,000

All fixed costs are expected to be incurred evenly throughout the year.

For the month of May 2019, the following information was made available pertaining to the
production of Bigsteel:

Opening stocks 2,350 units

Production 8,800 units
Closing stocks 1,150 units

Required:

a. Prepare separately the Marginal Costing and Absorption Costing Profit Statement of
Waja Sari Berhad for the month of May 2019.
(13 marks)

b. State the reasons why net profits reported in (a) above under marginal costing differs
from that calculated under absorption costing.
(2 marks)
(Total: 15 marks)

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SOLUTION QUESTION 2

a. Marginal costing income statement

Marginal costing production costs per unit:

RM
Raw material 23.00
Direct Labour 12.00
Variable production overhead 10.00
Total 45.00

Waja Sari Berhad

Marginal Costing Income Statement for the month of May 2019
RM RM
Sales (10,000 units x RM150) 1,500,000
Less: Variable Costs of Sales
Opening stocks (2,350 units x RM45) 105,750
Production Costs (8,800 units x RM45) 396,000
501,750
Less: Closing stocks (1,150 units x RM45) (51,750) (450,000)
Gross Margin 1,050,000
Less: Variable non-production overheads
Variable selling costs (8% x RM1,500,000) (120,000)
Contribution Margin 930,000
Less: Fixed costs
Fixed production overheads (7,850 units x RM18) 141,300
General administration costs (RM2,160,000 ÷ 12) 180,000
Marketing and promotion costs (RM1,080,000 ÷ 12) 90,000 (411,300)
Net Profit _518,700

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 Absorption costing production costs per unit:
RM
Raw material 23.00
Direct Labour 12.00
Variable production overhead 10.00
Fixed production overhead 18.00
Total 63.00

Waja Sari Berhad

Absorption Costing Income Statement for the month of May 2019
RM RM
Sales (10,000 units x RM150) 1,500,000
Less: Variable Costs of Sales
Opening stocks (2,350 units x RM63) 148,050
Production Costs (8,800 units) x RM63 554,400
702,450
Less: Closing stocks (1,150 units) x RM63 (72,450) (630,000)
Gross Profit 870,000
Less: Fixed costs
Variable selling costs (8% x 1,500,000) 120,000
General administration costs (RM2,160,000 ÷ 12) 180,000
Marketing and promotion costs (RM1,080,000 ÷12) 90,000
(390,000)
Unadjusted Net Profit 480,000
Overhead absorbed (8,800 x RM18) 158,400
Overhead incurred (7,850 x RM18) (141,300)
Add: Over absorbed of production overhead _17,100
Adjusted net profit 497,100

b. The differences in net profit reported under marginal costing and absorption
costing is due to the changes in the stock level. In this question, net profit
reported under marginal costing is higher because there is a decrease in stock
level by 1,200 units. Since product cost under marginal costing does not include
fixed production overhead, the cost of sales is lower compared to that of
absorption costing. Hence this results in higher net profit reported under marginal
costing of RM518,700 compared to RM497,100 under absorption costing. The net
profit reported under both costing method will be equal if the quantity produced
equal to the quantity sold.

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QUESTION 3 [MAF451/DEC 2018]

Syarikat Molly Beauty Berhad is a manufacturer of healthy consumable products which uses
natural plants as its ingredients. One of its popular products is known as ‘Molly Gel’ which is an
intensive collagen gel that can reduce wrinkles and maintain youthful look. It is sold in a box that
comprises of ten (10) sachets. Each box is sold at RM150.

The production of one box of ‘Molly Gel’ requires 2 kilogram of raw materials AA at a cost of
RM15 per kg, 3 kilogram of raw materials BB at a cost of RM10 per kg, and 2 hours of direct
labour at RM10 per hour. The company’s overhead costs consist of the following:

Fixed production overhead RM5 per box

Variable production overhead RM3 per box
Variable selling overhead RM2 per box

The budgeted annual production of ‘Molly Gel’ for the year of 2018 is 48,000 boxes.

Other monthly fixed costs of the company are as follows:

RM
General administration costs 30,000
Marketing and promotion costs 50,000

The following information is available for the month of January 2018, regarding the production
and sales of ‘Molly Gel’:
No of boxes
Opening inventory 500
Production 5,000
Sales 5,200

Required:

a. Report a Statement of Profit or Loss of Syarikat Molly Beauty Berhad for the month of
January 2018 using:

i. Marginal Costing approach

ii. Absorption Costing approach
(10 marks)

b. Discuss when will the profits reported under Marginal Costing and Absorption Costing
differ.
(5 marks)
(Total: 15 marks)

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SOLUTION 3

a. Marginal costing product cost per box:

Raw material AA (RM15 x 2) = 30.00

BB (RM10 x 3) = 30.00
Direct Labour (RM10 x 2) = 20.00
Variable production overhead = 3.00

Total 83.00

Syarikat Molly Beauty Berhad

Marginal Costing Income Statement for the month of July 2017
RM RM
Sales (5,200 boxes x RM150) 780,000
Less: Variable Costs of Sales
Opening stocks (500 boxes x RM83) 41,500
Production Costs (5,000 boxes x RM83) 415,000
456,500
Less: Closing stocks (300 boxes x RM83) (24,900) (431,600)
Gross Margin 348,400
Less: Variable non-production overheads
Variable selling costs (RM2 x 5,200 boxes) (10,400)
Contribution Margin 338,000
Less: Fixed costs
Fixed production OH (RM5 x 4,000 boxes) 20,000
General administration costs 30,000
Marketing & promotion cost 50,000 (100,000)

Net Profit 238,000

(10 x ½ mark = 5 marks)

Absorption costing product cost per unit:

Raw material AA (RM15 x 2) = 30.00
BB (RM10 x 3) = 30.00
Direct Labour (RM10 x 2) = 20.00
Variable production = 3.00
overhead
Fixed production overhead = 5.00
Total 88.00

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 Syarikat Molley Beauty Berhad
Absorption Costing Income Statement for the month of July 2017
RM RM
Sales (5,200 boxes x RM150) 780,000
Less: Costs of Goods Sold
Opening stocks (500 boxes x RM88) 44,000
Production Costs (5,000 boxes x RM88) 440,000
484,000
Less: Closing stocks (300 boxes x RM88) (26,400) (457,600)
Gross Profit 322,400
Less: Other Costs:

Variable selling costs (RM2 x 5,200 boxes) 10,400

General administration costs 30,000
Marketing & promotion cost 50,000 (90,400)

Unadjusted Net Profit 232,000

FPOH absorbed (RM5 x 5,000) 25,000
FPOH incurred (RM5 x 4,000) (20,000)
Add: Over absorbed 5,000
Adjusted net profit 237,000

b. Situation where profit reported under MC and AC differ:

Summary of effect on net income under both costing

methods
If (Situation) Effects on net income
Production units > sales AC > MC
units
Production units = sales AC = MC
units
Production units < sales AC < MC
units

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QUESTION 4 [MAF451/JUNE 2017]

Everlasting Paradise Bhd is a perfume manufacturer located in Puchong, Selangor. One of its
perfumes, ‘Fresh Everlasting’, is a new product which production was started in March 2017.
The monthly budgeted production is 40,000 units. Selling price is RM56 per unit.

Estimated costs per unit of ‘Fresh Everlasting’ are as follows:

RM
Prime costs 31
Production overhead 9
Total production cost 40
Selling and administrative overhead 6
Total costs 46

Other information:

• All prime costs are considered variable costs.

• One third of the production overhead varies according to unit produced.
• 70% of selling and administration overhead are fixed overhead.

The amount of fixed production overhead and fixed selling and administration overhead incurred
are the same as budgeted.

Based on the record, the actual production for March 2017 was 36,000 units and 32,000 units
were sold.

Required:

a. Construct a Statement of Profit or Loss for March 2017 using Marginal Costing and
Absorption Costing approaches.
(11 marks)

b. Analyse the difference in the net profit between both approaches.

(2 marks)

c. Discuss the usefulness of Marginal Costing approach as compare to Absorption Costing

approach.
(2 marks)
(Total: 15 marks)

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SOLUTION QUESTION 4 [MAF451/JUNE 2017]

a. Production cost per unit:

MC (RM) AC (RM)

Prime cost 31 31
Variable production overhead (w1) 3 3
Fixed production overhead (w1) - 6
---- ----
34 40
== ==
Workings:
(w1) variable production overhead per unit = 1/3 x RM9 = RM3

Fixed production overhead per unit = RM9 – RM3 = RM6

(w2) variable selling and admin OH = 30% x RM6 =RM1.80 per unit

Fixed selling and admin OH = 70% x RM6 =RM4.20 per unit

Everlasting Paradise Bhd

Marginal costing income statement for the month of December 2016
RM RM

Sales (32,000 x RM56) 1,792,000

Less: Variable cost of sales:
Production cost (36,000 x RM34) 1,224,000
Less: closing stock (4,000 x RM34) (136,000) (1,088,000)

Gross margin 704,000

Less: Variable non-production overhead:

Variable selling and administrative overhead
(RM1.80 (w2) x 32,000) (57,600)
Contribution margin 646,400

Less: Fixed cost:

Fixed production overhead (40,000 x RM6) 240,000

Fixed selling and administrative overhead
(40,000 x RM4.20 (w2)) 168,000 (408,000)
Net profit 238,400

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 Everlasting Paradise Bhd
Absorption costing income statement for the month of December 2016
RM RM

Sales (32,000 x RM56) 1,792,000

Less: Cost of sales:
Production cost (36,000 x RM40) 1,440,000
Less: closing stock (4,000 x RM40) (160,000) (1,280,000)

Gross profit 512,000

Less: Operating expenses:

Variable selling and administrative expense
(RM1.80 x 32,000) 57,600
Fixed selling and administrative expenses
(RM4.20 x 40,000) 168,000 (225,600)

Unadjusted net profit 286,400

Fixed Prod Overhead absorbed (36,000 x RM6) 216,000

Fixed Prod overhead incurred (40,000x RM6) (240,000)
Less : Under absorption of overhead (24,000)

Adjusted Net profit 262,400

b)
Profit Reconciliation Statement

Marginal Costing net profit RM 238,400

Add: increase in stock

(4,000 - 0) x RM6 RM 24,000

Absorption costing net profit RM 262,400

Reason:
Fixed production overhead absorbed in the stock

c) Marginal Costing (MC) - Internal reporting should use the MC approach. It provides
better information for management use because fixed and variable costs are separated
and MC is sensitive to the relationship between cost, volume and profit.

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QUESTION 5 [MAF451/ DEC 2016]

South Miami Sdn Bhd is a manufacturing company that produces snorkeling equipment’s. Its
profit and loss statement using the absorption costing method reported an increase in net profit
for the month of February 2016 compared to January 2016 as shown below:

January 2016 February 2016

RM RM RM RM
Sales 510,000 408,000
Beginning inventory of finished goods 10,500 10,500
Manufacturing cost 350,000 700,000
Ending inventory of finished goods (10,500) (430,500)
Cost of sales (350,000) (280,000)
Gross profit 160,000 128,000
Fixed selling and administration expenses (10,000) (10,000)
Variable selling and administration (51,000) (40,800)
expenses
Unadjusted net profit 99,000 77,200
(Under)/over absorption nil 100,000
Adjusted net profit 99,000 177,200

The following information relates to the above profit and loss statement:

1. Fixed manufacturing overhead is absorbed based on the budgeted monthly production

of 1,000 units.

2. The budgeted fixed manufacturing overhead is RM100,000 each month.

3. The variable production overhead per unit is RM250.

4. The selling price per unit is RM510.

Required:

a. Calculate the sales, production and ending inventory of finished goods (all in units) for
the month of January and February 2016.
(4 marks)

b. Prepare a Profit and Loss Statement using the marginal costing method for the month of
January and February 2016.
(12 marks)

c. Comment on the net profit calculated in (b) above with the net profit reported under
absorption costing method.
(2 marks)

d. Reconcile the marginal costing net profit with the net profit reported under the absorption
costing method for the month of February 2016.
(2 marks)
(Total: 20 marks)

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 SOLUTION QUESTION 5 [MAF451/DEC 2016]
a)
TC per unit = RM250 +RM100,000
1,000
= RM350

Jan 2012 (units) Feb 2012 (units)

Opening Inv RM10,500 RM10,500
RM350 = 30 RM350 = 30
Sales RM510,000 RM408,000
RM510 = 1,000 RM510 = 800
Production RM350,000 RM700,000 /
RM350 = 1,000 RM350 = 2,000
Closing Inv RM10,500 430,500
RM350 = 30 350 = 1,230
(8 x ½ = 4 marks)
b
Marginal Costing Income Statement Jan 2012 Feb 2012
RM RM RM RM
Sales 510,000 408,000
Beginning Inv of finished goods
(Jan: 30 x RM250; Feb: 30 x RM250) 7,500 7,500
Variable production cost
(Jan: 1,000 x RM250; Feb: 2,000 x RM250) 250,000 500,000
Ending Inv of finished goods
(Jan: 30 x RM250; Feb: 1,230 x RM250) (7,500) (307,500)
Variable cost of sales (250,000) (200,000)
Gross contribution 260,000 208,000
Variable selling and administration expenses (51,000) (40,800)
Contribution margin 209,000 167,200
Fixed production overhead (100,000) (100,000)
Fixed selling and administration expenses (10,000) (10,000)
Net profit 99,000 57,200
(24 x ½ = 12 marks)
c
The sales reduced from RM350,000 to RM280,000 thus leading to less contribution being
made and secondly the increased profit was actually attributed to the building up large ending
inventory of finished goods (beginning inventory of 30 units with a value of RM9,000 whilst
the ending inventory amounted to 1,230 units valued at RM369,000).
(4 x ½ mark = 2 marks)
d
NP Reconciliation Statement for February 2015
MC NP 57,200
Add: Increase in inventory of FG (1,230 – 30) = 1,200 x RM100 120,000
AC NP 177,200
(4 x ½ = 2 marks)
(Total: 20 marks)

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QUESTION 6 [MAF451 DEC 2018]

Bukit Melawati Sdn Bhd produces special medicine called “Doc away”. Based on its good
reputation in the market “Doc away” is currently sold at RM40.00 and normally being produced
at 40,000 units per year.

The following information relates to its operation for the year ended December 2018.

Variable cost per unit: RM

Direct material 6.00
Direct labour 5.00
Manufacturing overhead 2.00
Selling and distribution 3.00
Administration 2.00

Fixed costs per year: RM

Manufacturing overhead 80,000
Administration 30,000
Selling and distribution 9,000

Opening stock 4,000 units

Closing stock 1,000 units
Production 36,000 units

Total budgeted fixed manufacturing overhead for the year is RM80,000 and absorbed based on
units basis.

Required:

Prepare the Profit Statement using both Marginal and Absorption costing method for the year
ended December 2018.
(Total: 15 marks)

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SOLUTION QUESTION 6

a.
MC (RM) AC (RM)
Direct material 6.00 6.00
Direct labour 5.00 5.00
Variable manufacturing OH 2.00 2.00
Fixed manufacturing OH - 2.00 (RM80,000/40,000)
Total 13.00 15.00

Working: Units sold = opening stock + production – closing stock

= 4,000 + 36,000 – 1,000
= 39,000

Bukit Melawati Sdn Bhd

Marginal costing profit statement for the year ended December 2018
RM RM
Sales (39,000 x RM40) 1,560,000 ✓
Less: Variable cost of sales
Opening stock (4,000✓ x RM13✓✓✓) 52,000
Production cost (36,000 ✓x RM13) 468,000
Less: Closing stock (1,000 ✓x RM13) (13,000) (507,000)
Gross margin 1,053,000
Less: Variable non-production overhead
Selling and distribution (39,000 x RM3) 117,000 ✓
Admin cost (36,000 x RM2) 72,000 ✓ (189,000)
Contribution Margin ✓ 864,000
Less: Fixed costs
Fixed manufacturing overhead 80,000 ✓
Selling and distribution 9,000 ✓
Administration 30,000✓ (119,000)
Net Profit 745,000✓

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 Bukit Melawati Sdn Bhd
Absorption costing profit statement for the year ended December 2018
RM RM
Sales (39,000 x RM20) 1,560,000 ✓
Less: Variable cost of sales
Opening stock (4,000✓ x RM15✓✓✓) 60,000
Production cost (36,000 ✓x RM15) 540,000
Less: Closing stock (1,000 ✓x RM15) (15,000) (585,000)
Gross profit ✓ 975,000
Less: Selling and Distribution:
Variable (39,000 x RM3) 117,000 ✓
Fixed 9,000 ✓
Administration
Variable (36,000 x RM2) 72,000✓
Fixed 30,000✓ (228,000)
Unadjusted Net Profit 747,000
Less: Under absorption of overhead✓
Fixed production overhead absorbed (RM2 x 36,000) 72,000 ✓
Fixed production overhead incurred (RM2 x 40,000) 80,000 ✓ (8,000)
Net Profit 739,000✓

(30 ✓ x ½ = 15 marks)

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