PRACTICE EXERCISES II

SCENARIO-BASED QUESTIONS
CHAPTER 3,4
EXERCISE 1
Worked example: Marginal and absorption costing compared
TLF plc manufactures a single product, the Claud. The following figures relate to the Claud for a one-
year period.
Sales and production (units) 800
£
Sales 16,000
Production costs:
Variable 6,400
Fixed 1,600
Sales and distribution costs:
Variable 3,200
Fixed 2,400
The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout the year,
and actual fixed costs are the same as budgeted.
A predetermined overhead absorption rate is used for the year.
There were no inventories of Claud at the beginning of the year.
In the first quarter, 220 units were produced and 160 units sold.
Requirements
1. For the first quarter, calculate the fixed production costs absorbed by Claud if absorption costing is used.
2. For the first quarter, calculate inventory values per unit using both absorption costing and
marginal costing.
3. For the first quarter, calculate the under/over absorption of overheads.
4. For the first quarter, calculate the profit using absorption costing.
5. For the first quarter, calculate the profit using marginal costing.
6. For the first quarter, explain why there is a difference between the answers to Questions (4) and (5).

SOLUTIONS
1)
The requirements provide useful steps for analysing the example.
Budgeted fixed production costs/Budgeted output (normal level of activity) = £1,600/800 units
Absorption rate = £2 per unit produced.
During the quarter, the fixed production overhead absorbed would be 220 units × £2 = £440.
2)
Inventory values per unit

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 Absorption costing Marginal costing
£ per unit £ per unit
Variable production cost (£6,400/800) 8 8
Fixed production cost (£1,600/800) 2 –
Inventory value per unit 10 8
3)
£
Actual fixed production overhead 400 (1/4 of £1,60)
Absorbed fixed production overhead 440
Over absorption of fixed production overhead 40
4)
Profit for the quarter, absorption costing
In a scenario-based question the layout would be similar to the following:
£ £
Sales (160 × £20) 3,200
Production costs
Variable (220 × £8) 1,760
Fixed (absorbed overhead (220 × £2)) 440
Total (220 × £10) 2,200
Less closing inventories (60 × £10) 600
Production cost of sales 1,600
Adjustment for over absorbed overhead 40
Total production costs 1,560
Gross profit 1,640
Less sales and distribution costs
Variable (160 × £4) 640
Fixed (1/4 of £2,400) 600
1,240
Net profit 400
Using the 'short-cut' calculation method (suitable for multiple choice questions)
this answer can be derived as follows.
£ per unit £
Sales price 20
Less: Full absorption cost (10)
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 £ per unit £
Variable sales and distribution cost (4)
6
× sales volume 160 units 960
Less fixed sales and distribution costs (600)
360
Adjust for over absorbed overhead 40
Net profit 400
5)
Profit for the quarter, marginal costing
In a scenario-based question the layout would be similar to the following:
£ £
Sales 3,200
Variable production costs 1,760
Less closing inventories (60 × £8) 480
Variable production cost of sales 1,280
Variable sales and distribution costs 640
Total variable costs of sales 1,920
Total contribution 1,280
Less: Fixed production costs 400
Fixed sales and distribution costs 600
1,000
Net profit 280
Using the 'short-cut' calculation method (suitable for multiple choice questions)
this answer can be derived as follows.
£ per unit £
Sales price 20
Less: Variable production cost (8)
Variable sales and distribution cost (4)
Contribution per unit 8
× sales volume 160 units = contribution 1,280
Less: Fixed production costs (400)
Fixed sales and distribution costs (600)
Net profit 280
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6)
The difference in profit is due to the different valuations of closing inventory. In absorption costing, the 60
units of closing inventory include absorbed fixed overheads of £120 (60 × £2), which are therefore costs
carried over to the nextquarter and not charged against the profit of the first quarter.
In marginal costing, all fixed costs incurred in the period are charged against profit.
£
Absorption costing profit 400
Fixed production costs carried forward in inventory values (60 units × £2)* 120
Marginal costing profit 280
* Change in inventory units × fixed production cost per unit

EXERCISE 2
SCENARIO-QUESTION 2 IN QUESTION BANK
Kingsman Ltd (Kingsman) started business on 1 September manufacturing a single product, the A356.
The budgeted production cost per unit of the A356 is as follows:
£
Variable materials 78
Variable labour 12
Variable production overheads 6
Fixed production overheads 18
The budget showed production and sales for the first six months of 1,200 units. The budgeted selling price
is £170 per unit.
The budgeted selling, distribution and administration costs are as follows:
Fixed = £36,000 per annum
Variable = £2.50 per unit
Inventory at the end of September was 20 units of the A356. In October Kingsman sold 150 units and
manufactured 155 units. Budgeted fixed costs are incurred evenly per month. Actual costs and the selling
price were as budgeted except for the fixed selling, distribution and administration costs, which were
12.5% lower than budgeted.
Requirement
2.1. Calculate the profit or loss for October using both absorption costing and marginal costing.
Enter costs as negative values.

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 2.2. In the second six months of the year Kingsman plans to introduce the B786, a deluxe version of the
A356. The budgeted total absorption cost for the B786 is £420 per unit including £40 per unit for fixed
overheads. In order to set a selling price Kingsman plans to use a margin of 25% on the absorption cost.
Requirements
Select the correct answer.
If there is no inventory of the B786 at the end of the first six months of production, the profits calculated
under marginal costing will be_______those calculated under absorption costing.
 Higher than
 Lower than
 The same as
2.3. Calculate the percent mark-up for the B786 using marginal costing and the planned selling price.
__________%.
SOLUTIONS
Students check the solutions on page 96 of question bank (e-book version).

CHAPTER 5
EXERCISE 3
Product X is produced in two production cost centres. Budgeted data for product X is as follows:
Cost centre A Cost centre B
Direct material cost per unit £60.00 £30.30
Direct labour hours per unit 3 1
Direct labour rate per hour £20.00 £15.20
Production overhead absorption rate per direct labour hour £12.24 £14.94

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General overheads are absorbed into product costs at a rate of 10% of total production cost. The company
requires 20% return on sales to determine the selling price of the product X.
Requirement
1. Calculate the cost per unit of product X.
2. Calculate the profit margin of product X.
3. Calculate the selling price of product X.
SOLUTIONS

Cost centre A Cost centre B Total

£ per unit £ per unit £ per unit
Direct material 60.00 30.30 90.30
Direct labour 60.00 15.20 75.20
Production overhead 36.72 14.94 51.66
Total production cost 217.16
General overhead 10% 21.72
1) Total cost 238.88
2) Profit margin (=238.88 × 20/80) 59.72
3) Selling price 298.60

CHAPTER 6
EXERCISE 4
ECO Co manufactures two products, S and T, which use the same raw materials, D and E. One unit of S
uses 3 litres of D and 4 kilograms of E. One unit of T uses 5 litres of D and 2 kilograms of E. A litre of D is
expected to cost £3 and a kilogram of E £7.
Budgeted sales for 20X2 are 8,000 units of S and 6,000 units of T; finished goods in inventory at1 January
20X2 are 1,500 units of S and 300 units of T, and the company plans to hold inventories of600 units of each
product at 31 December 20X2.
Inventories of raw material are 6,000 litres of D and 2,800 kilograms of E at 1 January and the company
plans to hold 5,000 litres and 3,500 kilograms respectively at 31 December 20X2.
The warehouse and stores managers have suggested that a provision should be made for damages and
deterioration of items held in store, as follows.
Product S: loss of 50 units
Product T: loss of 100 units
Material D: loss of 500 litres
Material E: loss of 200 kilograms
Requirement
Prepare a material purchases budget for the year 20X2.
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SOLUTIONS

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EXERCISE 5

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SOLUTIONS

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CHAPTER 7
EXERCISE 6
The company is now preparing its cash receipts budget for the months March, April and May. Total
budgeted sales of all feeders are £120,000 in each month from January to March, £130,000 in April and
£140,000 in May.
30% of sales in any month are for cash and customers who pay cash receive a 2% discount.
70% of sales in any month are made on credit. 75% of customers pay after one month and 20% pay after
two months. The remainder is never paid.
Requirement
1) Prepare the following cash receipts budget extracts for the period March to May.
You should make an entry in every box in the cash budget. Enter a zero or dash where applicable. Do not
leave any boxes blank. All figures should be entered to the nearest £.
March April May
£ £ £
Receipts from cash sales
Receipts from credit sales
The company is now preparing its cash payments budget for the Seed. Sales of the Seed are budgeted to be
4,100 units per month in the period January to March, rising to 4,200 units in April and 4,300 units in May
and June.
Production of the Seed takes place a month before sale. Labour and materials costs per unit are budgeted to
be the same as December but no overtime is expected in this period.
Materials are purchased in the month before production and paid for one month later. The company receives
a discount of 5% on these purchases.
40% of labour costs are paid in the month of production and the balance is paid for one month after
production.
Requirement
2) Prepare the following cash payments budget extracts for the Seed for the period March to May.
You should make an entry in every box in the cash budget. Enter a zero or dash where applicable. Do not
leave any boxes blank. All figures should be entered to the nearest £.
March April May
£ £ £
Payments for the Seed materials purchases
Payments for the Seed labour costs

SOLUTIONS
1) Prepare the following cash receipts budget extracts for the period March to May.
You should make an entry in every box in the cash budget. Enter a zero or dash where applicable. Do not
leave any boxes blank. All figures should be entered to the nearest £.
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 March April May
£ £ £
Receipts from cash sales 35,280 38,220 41,160
Receipts from credit sales 79,800 79,800 85,050

WORKINGS
January February March April May
£ £ £ £ £
Sales 120,000 120,000 120,000 130,000 140,000
Cash proportion (30%) 36,000 36,000 36,000 39,000 42,000
Credit proportion (70%) 84,000 84,000 84,000 91,000 98,000

Cash receipts:
Cash less discount ( 35,280 35,280 35,280 38,220 41,160
0.98)

Credit receipts:
75% after 1 month 63,000 63,000 63,000 68,250
20% after 2 months 16,800 16,800 16,800
Total credit receipts 79,800 79,800 85,050
2) Prepare the following cash payments budget extracts for the Seed for the period March to May.
You should make an entry in every box in the cash budget. Enter a zero or dash where applicable. Do not
leave any boxes blank. All figures should be entered to the nearest £.
March April May
£ £ £
Payments for the Seed material purchases 19,152 19,608 19,608
Payments for the Seed labour costs 24,840 25,440 25,800
WORKINGS
January February March April May
£ £ £ £ £
Production units of Seed 4,100 4,100 4,200 4,300 4,300
Payments for the Seed
materials purchases ( 95%) –
purchased 2 months before
sale and paid for 1 month
later (ie, month of production) 19,152 19,608 19,608

Production units of Seed 4,100 4,100 4,200 4,300 4,300

Labour amount due ( £24 
0.25 hours) 24,600 24,600 25,200 25,800 25,800
40% paid in production month 10,080 10,320 10,320
60% paid 1 month after
production month 14,760 15,120 15,480
Payments for Seed labour cost 24,840 25,440 25,800

The end
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