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Practice Questions - Marginal and Absorption Costing

Maths

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70 views

Practice Questions - Marginal and Absorption Costing

Maths

Uploaded by

nkhalangoc
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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MARGINAL CODTING AND SHORT RUN DECISION MAKING

PRACTICE QUESTIONS
1. Chinchei Ltd manufactures one product which is sold at K100 per unit. The following
is the budgeted profit and loss statement for six months, based on sales and
production at the normal level of activity:

K’000 K’000
Sales 5,000
Costs
Direct material 1,500
Direct wages 1,000
Factory overheads: Variable 250
Fixed 1,000
Selling and distribution overhead-fixed 250
Administration overhead-fixed 500
4,500
Net profit 500

Budgets have been prepared for the six months ending 30 June 2024, and the six
months ending 31 December 2024.

In the six months budget to 30 June 2024, sales are budgeted at 80% of normal
activity while production is budgeted at normal activity level.

In the six months budget to 31 December 2024, sales are budgeted at normal activity
while production is budgeted at 80% of normal activity to reduce stocks
manufactured in the previous budget period.

Required:
a) Prepare the budgeted profit and loss statements for each budget period using:
i) Absorption costing method
ii) Marginal costing method
b) Show a reconciliation of the two profits in a) above

2. AV Ltd, a videotape shop, purchases tapes at K80 each and sales them at K140.
Variable selling cost K10 per tape and fixed costs are K240,000 per annum.
Required
a) Calculate the contribution per tape
b) Calculate the contribution margin
c) If AV sells 6,500 tapes, calculate its profit/loss
d) Calculate the break even point in number of tapes
e) Calculate the number of tapes to be sold for AV Ltd to earn a profit of K320,000
f) AV’s manager wants a profit of K260,000 and believes that sales will be 8,000
tapes. Calculate the required selling price

3. C Company buys and sells decorated beach towels. C purchases towels at K120 each
and sells them for K240. Variable selling costs are 25% of sales, and fixed costs are
K1,500,000 annually.

Required
a) Variable cost per towel sold
b) Contribution sales ratio (in percentages)
c) Breakeven point in units
d) Sales revenue required to make a profit of K30,000 per year.

4. L and Co is engaged in providing and marketing a standard advice service.


Summarised results for the past two months reveal the following:
October November
Sales (in units of a service) 200 300
Sales revenue (K) 5,000 7,500
Operating profit 1,000 2,200
Required
Calculate the number of service units L and Co needs in a month to breakeven

5. A business makes three products A, B and C. All the three products require the use of
two types of machine: cutting machines and assembling machines. Estimates for next
year include the following:
A B C
Selling price per unit (K) 25 30 18
Sales demand (units) 2,500 3,400 5,100
Material cost per unit (K) 12 13 10
Variable production cost per unit (K) 7 4 3
Time required on cutting machine per unit 1 1 0.5
Time required on assembling machine per unit 0.5 1 0.5
Fixed costs for next year are expected to be K42,000. It is the business’ policy for
each unit of production to absorb these in proportion to its total variable costs.

The business has cutting machine capacity of 5,000 hours a year and assembling
machine capacity of 8,300 hours a year.

Required
a) State which products and in which quantities should the business plan to make
next year
b) State the maximum price per product that would be worth the business paying to
a subcontractor to carry out that part of the work that could not be done
internally

6. The management accountant was too busy to provide a full management report at the
extra-ordinary meeting. Instead, she summarised everything through the chart below:

Study the chart and answer the questions (i) to (viii) below:

Revenue/cost X
(K’000)
Y

30

Z
20

10

0
1,000 (Quantity)
Required
i. Identify the lines X, Y and Z
ii. How much are the fixed costs for the business?
iii. Calculate the contribution per unit
iv. Calculate the contribution margin (contribution/sales ratio) for the business.
v. Calculate the amount of revenue required to make a profit of K15,000.
vi. If fixed costs increase by 10% next month, what contribution margin would give the
same break-even point as given in the chart above?
vii. If a profit of K23,000 is to be achieved in situation (vi) above, how much is the
margin of safety in sales revenue?

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