# Variable and Absorption Costing

Topics: Variable cost, Costs, Fixed cost Pages: 48 (13975 words) Published: January 15, 2011
PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING QUESTIONS Marginal Costing Vs. Absorption Costing 1. During the current period, ABC Ltd sold 60,000 units of product at Rs. 30 per unit. At the beginning for the period, there were 10,000 units in inventory and ABC Ltd manufactured 50,000 units during the period. The manufacturing costs and selling and administrative expenses were as follows: Total cost Rs. Beginning inventory: Direct materials Direct labour Variable factory overhead Fixed factory overhead Total Current period costs: Direct materials Direct labour Variable factory overhead Fixed factory overhead Total Selling and administrative expenses: Variable Fixed Total Instructions: 1. 2. 3. Prepare an income statement based on the variable costing concept. Prepare an income statement based on the absorption costing concept. Give the reason for the difference in the amount of income from operations in 1 and 2. 65,000 45,000 1,10,000 3,50,000 8,10,000 90,000 1,00,000 13,50,000 50,000 50,000 50,000 50,000 7.00 16.20 1.80 2.00 27.00 67,000 1,55,000 18,000 20,000 2,60,000 10,000 10,000 10,000 10,000 6.70 15.50 1.80 2.00 26.00 Number of units Unit cost Rs.

Profitability Analysis, Flexible Budget and Marginal Costing 2. A budgeted profit statement of a company working at 75% capacity is provided to you

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below, Sales Less: 9,000 units at Rs. 32 Direct materials Direct wages Production overhead: fixed variable Gross profit Less: Administration, selling and distribution costs: fixed varying with sales volume Net profit You are required to: (a) Calculate the breakeven point in units and in value. (b) It has been estimated that: (i) if the selling price per unit were reduced to Rs. 28, the increased demand would utilise 90% of the company's capacity without any additional advertising expenditure, and 36,000 27,000 63,000 39,000 42,000 18,000 1,86,000 1,02,000 Rs. 54,000 72,000 Rs. 2,88,000

(ii) to attract sufficient demand to utilise full capacity would require a 15% reduction in the current selling price and a Rs. 5,000 special advertising campaign. You are required to present a statement showing the effect of the two alternatives compared with the original budget and to advise management which of the three possible plans ought to be adopted, i.e., the original budget plan or (i) above or (ii) above. (c) An independent market research study shows that by spending Rs. 15,000 on a special advertising campaign, the company could operate at full capacity and maintain the selling price at Rs. 32 per unit. You are required to: (i) 3. Advise management whether this proposal should be adopted. CVP Analysis (a) ABC Ltd. expects to maintain the same inventories at the end of the year as at the beginning of the year. The estimated fixed costs for the year are Rs. 2,88,000, and

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the estimated variable costs per unit are Rs. 14. It is expected that 60,000 units will be sold at a price of Rs. 20 per unit. Maximum sales within the relevant range are 70,000 units. Instructions: 1. 2. 3. What is (a) the contribution margin ratio and (b) the unit contribution margin? Determine the break-even point in units. What is the margin of safety?

Standard Costing (b) Garland Company uses a standard cost system. The standard for each finished unit of product allows for 3 kgs of plastic at Rs. 0.72 per kg. During December, Garland bought 4,500 kgs of plastic at Rs. 075 per kg, and used 4,100 kgs in the production of 1,300 finished units of product. What is the material purchase price variance for the month of December ? Budget: Functional Budgets 4. Selected information concerning sales and production for ABC Ltd. for July, 2006 are summarised as follows: a. Estimated sales: Product K: 40,000 units at Rs. 30.00 per unit Product L: 20,000 units at Rs. 65.00 per unit b. Estimated inventories, July 1, 2006: Material A: 4,000 kgs. Material B: 3,500 kgs. Product K: 3,000 units at Rs. 17 per unit Product L: 2,700 units at Rs. 35 per unit Total...