Marginal and Absorption Costing Techniques

Question 1
The following information is relevant about a product
N
Selling price per unit 35
Variable cost per unit 8
Fixed cost per unit (based on budgeted overhead of N120,000
and normal level of activity of 20,000 units) 6
Units
Opening inventory 2,000
Actual production 20,000
Closing inventory 4,000
Required:
Prepare MC and TAC operating statements and reconcile the profit difference.

Question 2
The following information is relevant about a product
N
Selling price per unit 50
Variable cost per unit 30
Fixed cost per unit (based on budgeted overhead of N100,000
and normal level of activity of 25,000 units) 4
Units
Opening inventory 2,000
Closing inventory 1,500
Actual production 25,500
Required:
a) Prepare a marginal cost profit statement
b) Prepare an absorption cost profit statement
c) Reconcile the two profit figures by comparing the impact of the inventory movement
under each approach.

Question 3
AGBATI limited produces COLA wine which is bottled and sold in cases. The normal annual
level of production on which the fixed production overhead absorption is based is 80,000
cases. Data for the last financial year ended 31 December, 2009 were as follows:
Production 90,000
Sales 75,000
Per Case
N
Sales 1,500
Cost:
Direct Material 500

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Direct Labour 400
Variable Overhead 200
Fixed Production Overhead 1,500,000
Variable selling and distribution cost 10% of sales revenue.
Fixed selling and distribution cost N150,000
Required:
i. Marginal Costing
ii. Absorption Costing

Question 4
Modadeola Nigeria Limited produced “Pomade” in 2021, and made the following data
available. As a management accountant, you are required to present to the management of
Modadeola Nigeria limited the profit based on:
Marginal costing; and
Absorption costing
Selling Price N20.00 per unit
Variable manufacturing cost N8.00 per unit
Fixed manufacturing cost N20,000
Selling and administrative cost Fixed N10,000
Variable N4.00 per unit
Units produced 20,000
Units sold 19,500

Question 5
The following data in kilograms were taken from the records of Najaatu Bala Rabiu Limited:
Period 1 Period 2 Period 3
Production 30,000 38,000 27,000
Sales 30,000 27,000 38,000
Opening inventory - - 11,000
Closing inventory - 11,000 -
The firm makes a single product, the financial details of which are as follows (based on a
normal activity level of 30,000 kgs):
Cost per kg
N
Direct material 1.50
Direct labour 1.00
Production overheads (300% of labour) 3.00
Selling price per unit 9.00
Administrative overheads are fixed at N25,000 and also one third of the production overheads
are fixed.
Required:
Prepare separate operating statements based on marginal costing and absorption costing
techniques.

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Question 6
A company that manufactures one product has calculated its cost on a quarterly production
budget of 10,000 units. The selling price was N5 per unit.
Sales in the four successive quarters of the last year were:
Quarter 1 10,000 units
Quarter 2 9,000 units
Quarter 3 7,000 units
Quarter 4 5,500 units

The level of stock at the beginning of the year was 1,000units and the company maintained its
stock of finished products at the same level at the end of each of the four quarters.
Based on its quarterly production budget, the cost per unit was:
N
Prime cost 3.50
Production overhead (variable and fixed) 0.75
Selling and administration overhead 0.30
Total 4.55

Fixed production overhead, which has been taken into account in calculating the above
figures, was N5,000 per quarter. Selling and administration overhead was treated as fixed,
and was charged against sales in the period in which it was incurred.
You are required:
Present a tabular statement to show net profit of the four quarters:
a. Under absorption costing
b. Under marginal costing
(Remember, only production cost can be absorbed into stock values; selling and
administration fixed overheads must always be charged to profit in the period incurred).

Question 7
Rayners plc manufactures and sells electric blankets. The selling price is N12 per blanket.
Each blanket has the following unit cost:
N
Direct material 2
Direct labour 1
Variable production overhead 2
Fixed production overhead 3
8

Administration costs are incurred at the rate of N20,000 per annum

The company achieved the following production and sales of blankets:
Year 1 2 3
Production (‘000 units) 100 110 90
Sales (‘000 units) 90 110 95
The following information is also relevant:

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i. The overhead costs of N2 and N3 per unit have been calculated on the basis of a
budgeted production volume of 90,000 units.
ii. There was no inflation
iii. There was no opening stock at the beginning of the year 1
Required:
a. Prepare an operating statement for each year using:
i. marginal costing
ii. absorption costing (8 marks)
b. Explain why the profit figures reported under the two techniques disagree
(2 marks)
(Total: 10 marks)
Question 8
A company uses marginal costing. In the financial period that has just ended, opening
inventory was N8,000 and closing inventory was N15,000. The reported profit for the year
was N96,000.
If the company had used absorption closing, opening inventory would have been N15,000 and
closing inventory would have been N34,000.
Required:
What would have been the profit for the year if absorption costing had been used?

Question 9
A company uses absorption costing. In the financial period that has just ended, opening
inventory was N76,000 and closing inventory was N49,000. The reported profit for the year
was N183,000.
If the company had used marginal costing, opening inventory would have been N40,000 and
closing inventory would have been N28,000.
Required:
What would have been the profit for the year if marginal costing had been used?

Question 10
The following information relates to a manufacturing company for a period:
Production 16,000 units Fixed production costs N80,000
Sales 14,000 units Fixed selling costs N28,000
Using absorption costing, the profit for the period would be N60,000.
Required:
What would have been the profit for the year if marginal costing had been used?

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