Question Tag: Absorption Costing

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ICMA – Nov 2024 – L1 – Q1a – Marginal and Absorption Costing

Prepares profit or loss statements using both marginal costing and absorption costing methods.

Question

Profit or Loss Statement using Marginal and Absorption Costing
The following data has been extracted from the operating records of Agongon LTD for the last two quarters of the year to 31 December, 2023:

Quarter	3	4
Production units	8,400	10,200
Sales units	6,600	11,400

GH¢
Selling price per unit 120
Variable manufacturing cost per unit:

Direct material cost 24
Direct labour cost 18
Variable overheads 12

Fixed production overheads are budgeted at GH¢144,000 for a budgeted production of 9,600 units per quarter. These overheads are absorbed on a per-unit production basis.

Non-production overheads comprised:

Fixed administration expenses of GH¢48,000 per quarter
Selling and distribution expenses 10% of sales.

Required:
Prepare a statement of profit or loss for each quarter using:
a) The Marginal Costing technique
b) The Absorption Costing technique

Answer

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Tags: Absorption Costing, Financial Reporting, Marginal Costing, Profit, Variance
Level: Level 1

Topic: Marginal Costing and Absorption Costing
Series: Nov 2024

PM – May 2021 – L2 – Q6 – Costing Systems and Techniques

Evaluate production costs per unit using both absorption and activity-based costing for Chukwukah Nigeria Limited.

Question

Chukwukah Nigeria Limited manufactures three products, JEL, JET and JAL. Demand for
products JEL and JET is relatively elastic whilst demand for product JAL is relatively
inelastic. Each product uses the same materials and the same type of direct labour but
in different quantities. For many years, the company has been using full absorption
costing and absorbing overheads on the basis of direct labour hours. Selling prices are
then determined using cost plus pricing. This is common in the company‟s industry with
most competitors applying a standard mark-up.
Budgeted production and sales volumes for JEL, JET and JAL for the next year are
25,000, 20,000 and 27,600 units respectively.
The budgeted direct costs of the three products are shown below:

In the coming year, Chukwukah also expects to incur indirect production costs of
N6,887,000, which are analysed as follows:

The following additional data relates to each product:

The management of Chukwukah Nigeria Limited wants to boost sales revenue in order to
increase profits but its capacity to do this is limited because of its use of cost plus
pricing and the application of standard mark-up. The management accountant has
suggested using activity based costing (ABC) instead of full absorption costing, since
this will alter the cost of the products and may therefore enable a different price to be
charged.

Required:
a. Calculate the budgeted full production cost per unit of each product using absorption costing, rounded to two decimal places. (6 Marks)

b. Calculate the budgeted full production cost per unit of each product using activity-based costing (ABC), rounded to two decimal places. (8 Marks)

c. Discuss the impact on selling prices and sales volumes of each product that could result from changing to activity-based costing. (6 Marks)

Answer

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Tags: Absorption Costing, Activity-Based Costing, Direct Costs, Elasticity of Demand, Pricing
Level: Level 2

Topic: Costing Systems and Techniques
Series: MAY 2021

PM – Nov 2014 – L2 – Q6 – Standard Costing and Variance Analysis

Reconcile budgeted and actual gross profits for GOODLAND Limited, including variance calculations.

Question

GOODLAND Limited produces and sells a single product. The company adopts a standard absorption costing system and absorbs overheads on the basis of direct labour hours. Presented below are the standard cost details and selling price for a single unit of the product:

It has been estimated that the production and sales for the month would be 2,000 units. However, the estimated production for the month has been used as a basis for determining the fixed overhead absorption rate.

The actual results for the month are as follows:

Required:

Prepare a statement that reconciles the budgeted gross profit with the actual gross profit for the month with a detailed computation of all the variances involved. (15 Marks)

Answer

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Tags: Absorption Costing, Overhead Variance, Profit reconciliation, Standard Costing, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis

PM – Nov 2020 – L2 – Q3 – Standard Costing and Variance Analysis

Reconcile budgeted and actual profit using variance analysis and evaluate fixed overheads under absorption costing.

Question

Toma Paste Nigeria Limited produces tomato paste which serves as an alternative for an immediate stew for working mothers instead of using fresh tomatoes. For the forthcoming period, the company’s budgeted fixed costs were ₦600,000 and budgeted production and sales were 13,000 units.

The product has the following standard cost:

Description	Cost (N)
Selling price	500
Materials: 5kg @ ₦40/kg	200
Labour: 3hrs @ ₦40/hr	120
Variable overheads: 3hrs @ ₦30/hr	90

Actual results for the period were:

11,000 units were made and sold, earning revenue of ₦5,720,000.
66,000 kg of materials were bought at a cost of ₦2,970,000, but only 63,000 kg were used.
36,000 hours of labour were paid for at a cost of ₦1,422,000.
The total cost for variable overheads was ₦1,170,700 and fixed costs were ₦400,000.

The company uses marginal costing and values all inventory at standard cost.

Required:
a. Prepare a statement reconciling actual and budgeted profit using appropriate variances. (12 Marks)
b. Recalculate the fixed production overhead variances, assuming the company uses absorption costing. (4 Marks)
c. Discuss possible causes for the labour variances you have calculated. (4 Marks)

Answer

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Tags: Absorption Costing, Labour Variance, Marginal Costing, Profit reconciliation, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2020

MI – Nov 2020 – L1 – SA – Q9 – Costing Techniques

Determine when the profit under marginal costing equals that of absorption costing.

Question

In which of the following will the profit of marginal costing equal absorption costing?

A. There is only closing stock

B. There is only opening stock

C. There is both opening and closing stock

D. There is no change in stock levels

E. There are lower fixed costs

Answer

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Tags: Absorption Costing, Inventory Levels, Marginal Costing, Profit
Level: Level 1

Topic: Costing Techniques
Series: NOV 2020

PM – May 2018 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate sales variances and discuss their significance in standard costing.

Question

Nwokocha and Sons Bakery Limited uses absorption costing technique in its
accounting system. The company produces and sells three bakery products, namely
four corner loaf (F), round corner loaf (R) and executive loaf (E) which are
substitutes for each other. The following standard selling prices and cost data
relate to these three products:

Annual budgeted fixed production overhead was N3,840,000. The company policy
is that overhead will be absorbed on a machine hour basis. The standard machine
hour for each product and the monthly budgeted level of production and sales for
each product are as follows;

Actual volumes and selling prices for the three products in a particular month are
as follows:

a. Calculate the following variances for overall sales for the particular month:
i. Sales price variance; (2 Marks)
ii. Sales volume profit variance; (2 Marks)
iii. Sales mix profit variance; and (3 Marks)
iv. Sales quantity profit variance. (3 Marks)
b. Determine the monthly budgeted profit for the company. (6 Marks)
c. Discuss the significance of mix variances in a standard costing system?
(4 Marks)

Answer

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Tags: Absorption Costing, Bakery, Performance Evaluation, Sales Variances
Level: Level 2

Topic: Variance Analysis
Series: MAY 2018

MI – Nov 2014 – L1 – SB – Q2 – Costing Methods

This question requires preparing profit statements using the absorption costing approach.

Question

LADUGBO Limited, a company which manufactures and sells a single product named BETA, has the following data relating to the year 2015:

Particulars	N
Selling Price	45.00
Direct Material Cost	10.00
Direct Wages Cost	4.00
Variable Overhead Cost	2.50

The following forecasts of sales and production are expected during the first six months of 2015:

Particulars	January-March	April-June
Sales (units)	60,000	90,000
Production (units)	70,000	100,000

Fixed production overhead costs are budgeted at N400,000 per annum. Normal production level is 320,000 units per annum.
Variable selling and distribution cost is N1.50 per unit sold, while fixed administration cost is N240,000 per annum.

You are required to:
Prepare profit statements for each of the two quarters, in a columnar format, using the absorption costing approach. (20 Marks)

Answer

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Tags: Absorption Costing, Fixed Overhead, Profit Statement, Variable Overhead
Level: Level 1

Topic: Costing Methods
Series: NOV 2014

MI – Nov 2014 – L1 – SA – Q17 – Costing Methods

This question asks about the appropriate method for allocating overhead costs in product costing.

Question

A method of product costing which aims to include, in the total cost of a product, an appropriate share of the organisation’s total overhead is:
A. Marginal costing
B. Activity-based costing
C. Differential costing
D. Absorption costing
E. Product costing

Answer

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Tags: Absorption Costing, Activity-Based Costing, Costing Techniques, Product costing
Level: Level 1

Topic: Costing Methods
Series: NOV 2014

MI – May 2022 – L1 – SB – Q3 – Costing Techniques

Prepare profit or loss statements using both absorption and marginal costing, and explain the differences.

Question

Paquris Limited is into the manufacture of various products. The following data refer to one of its products for a one-month period:


Direct material – Units 120,000	₦3,000,000
Direct labour – Hours 120,000	₦6,600,000
Direct expenses	₦2,000,000
Variable production overhead	₦1,500,000
Fixed production overhead	₦3,600,000
Variable non-production overhead	₦1,020,000
Fixed non-production overhead	₦4,740,000
Sales – Units 115,000	₦25,300,000
Opening inventory	–

You are required to:
a. Prepare the statement of profit or loss using full absorption costing. (8 Marks)
b. Prepare the statement of profit or loss using marginal costing. (7 Marks)
c. Prepare closing inventory valuation on both bases. (3 Marks)
d. State and explain the differences between (a) and (b). (2 Marks)

Answer

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Tags: Absorption Costing, Marginal Costing, Profit statements
Level: Level 1

Topic: Costing Techniques
Series: MAY 2022

MI – May 2022 – L1 – SA – Q3 – Costing Methods

Condition under which variable and absorption costing produce the same profit.

Question

Variable costing and absorption costing statements produce the same profit under which of the following conditions?

A. Production equals sales
B. Production exceeds sales
C. Sales exceed production
D. Sales equal fixed overhead
E. Production equals fixed overhead

Answer

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Tags: Absorption Costing, Profit, Variable Costing
Level: Level 1

Topic: Costing Methods
Series: MAY 2022

ICMA – Nov 2024 – L1 – Q1a – Marginal and Absorption Costing

Prepares profit or loss statements using both marginal costing and absorption costing methods.

Question

Quarter	3	4
Production units	8,400	10,200
Sales units	6,600	11,400

GH¢
Selling price per unit 120
Variable manufacturing cost per unit:

Direct material cost 24
Direct labour cost 18
Variable overheads 12

Fixed production overheads are budgeted at GH¢144,000 for a budgeted production of 9,600 units per quarter. These overheads are absorbed on a per-unit production basis.

Non-production overheads comprised:

Fixed administration expenses of GH¢48,000 per quarter
Selling and distribution expenses 10% of sales.

Required:
Prepare a statement of profit or loss for each quarter using:
a) The Marginal Costing technique
b) The Absorption Costing technique

Answer

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Tags: Absorption Costing, Financial Reporting, Marginal Costing, Profit, Variance
Level: Level 1

Topic: Marginal Costing and Absorption Costing
Series: Nov 2024

PM – May 2021 – L2 – Q6 – Costing Systems and Techniques

Evaluate production costs per unit using both absorption and activity-based costing for Chukwukah Nigeria Limited.

Question

In the coming year, Chukwukah also expects to incur indirect production costs of
N6,887,000, which are analysed as follows:

The following additional data relates to each product:

Required:
a. Calculate the budgeted full production cost per unit of each product using absorption costing, rounded to two decimal places. (6 Marks)

b. Calculate the budgeted full production cost per unit of each product using activity-based costing (ABC), rounded to two decimal places. (8 Marks)

c. Discuss the impact on selling prices and sales volumes of each product that could result from changing to activity-based costing. (6 Marks)

Answer

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Tags: Absorption Costing, Activity-Based Costing, Direct Costs, Elasticity of Demand, Pricing
Level: Level 2

Topic: Costing Systems and Techniques
Series: MAY 2021

PM – Nov 2014 – L2 – Q6 – Standard Costing and Variance Analysis

Reconcile budgeted and actual gross profits for GOODLAND Limited, including variance calculations.

Question

The actual results for the month are as follows:

Required:

Prepare a statement that reconciles the budgeted gross profit with the actual gross profit for the month with a detailed computation of all the variances involved. (15 Marks)

Answer

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Tags: Absorption Costing, Overhead Variance, Profit reconciliation, Standard Costing, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis

PM – Nov 2020 – L2 – Q3 – Standard Costing and Variance Analysis

Reconcile budgeted and actual profit using variance analysis and evaluate fixed overheads under absorption costing.

Question

The product has the following standard cost:

Description	Cost (N)
Selling price	500
Materials: 5kg @ ₦40/kg	200
Labour: 3hrs @ ₦40/hr	120
Variable overheads: 3hrs @ ₦30/hr	90

Actual results for the period were:

11,000 units were made and sold, earning revenue of ₦5,720,000.
66,000 kg of materials were bought at a cost of ₦2,970,000, but only 63,000 kg were used.
36,000 hours of labour were paid for at a cost of ₦1,422,000.
The total cost for variable overheads was ₦1,170,700 and fixed costs were ₦400,000.

The company uses marginal costing and values all inventory at standard cost.

Answer

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Tags: Absorption Costing, Labour Variance, Marginal Costing, Profit reconciliation, Variance Analysis
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2020

MI – Nov 2020 – L1 – SA – Q9 – Costing Techniques

Determine when the profit under marginal costing equals that of absorption costing.

Question

In which of the following will the profit of marginal costing equal absorption costing?

A. There is only closing stock

B. There is only opening stock

C. There is both opening and closing stock

D. There is no change in stock levels

E. There are lower fixed costs

Answer

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Tags: Absorption Costing, Inventory Levels, Marginal Costing, Profit
Level: Level 1

Topic: Costing Techniques
Series: NOV 2020

PM – May 2018 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate sales variances and discuss their significance in standard costing.

Question

Actual volumes and selling prices for the three products in a particular month are
as follows:

Answer

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Tags: Absorption Costing, Bakery, Performance Evaluation, Sales Variances
Level: Level 2

Topic: Variance Analysis
Series: MAY 2018

MI – Nov 2014 – L1 – SB – Q2 – Costing Methods

This question requires preparing profit statements using the absorption costing approach.

Question

LADUGBO Limited, a company which manufactures and sells a single product named BETA, has the following data relating to the year 2015:

Particulars	N
Selling Price	45.00
Direct Material Cost	10.00
Direct Wages Cost	4.00
Variable Overhead Cost	2.50

The following forecasts of sales and production are expected during the first six months of 2015:

Particulars	January-March	April-June
Sales (units)	60,000	90,000
Production (units)	70,000	100,000

Fixed production overhead costs are budgeted at N400,000 per annum. Normal production level is 320,000 units per annum.
Variable selling and distribution cost is N1.50 per unit sold, while fixed administration cost is N240,000 per annum.

You are required to:
Prepare profit statements for each of the two quarters, in a columnar format, using the absorption costing approach. (20 Marks)

Answer

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Tags: Absorption Costing, Fixed Overhead, Profit Statement, Variable Overhead
Level: Level 1

Topic: Costing Methods
Series: NOV 2014

MI – Nov 2014 – L1 – SA – Q17 – Costing Methods

This question asks about the appropriate method for allocating overhead costs in product costing.

Question

Answer

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Tags: Absorption Costing, Activity-Based Costing, Costing Techniques, Product costing
Level: Level 1

Topic: Costing Methods
Series: NOV 2014

MI – May 2022 – L1 – SB – Q3 – Costing Techniques

Prepare profit or loss statements using both absorption and marginal costing, and explain the differences.

Question

Paquris Limited is into the manufacture of various products. The following data refer to one of its products for a one-month period:


Direct material – Units 120,000	₦3,000,000
Direct labour – Hours 120,000	₦6,600,000
Direct expenses	₦2,000,000
Variable production overhead	₦1,500,000
Fixed production overhead	₦3,600,000
Variable non-production overhead	₦1,020,000
Fixed non-production overhead	₦4,740,000
Sales – Units 115,000	₦25,300,000
Opening inventory	–

Answer

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Tags: Absorption Costing, Marginal Costing, Profit statements
Level: Level 1

Topic: Costing Techniques
Series: MAY 2022

MI – May 2022 – L1 – SA – Q3 – Costing Methods

Condition under which variable and absorption costing produce the same profit.

Question

Variable costing and absorption costing statements produce the same profit under which of the following conditions?

A. Production equals sales
B. Production exceeds sales
C. Sales exceed production
D. Sales equal fixed overhead
E. Production equals fixed overhead

Answer

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Tags: Absorption Costing, Profit, Variable Costing
Level: Level 1

Topic: Costing Methods
Series: MAY 2022

Question Tag: Absorption Costing

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ICMA – Nov 2024 – L1 – Q1a – Marginal and Absorption Costing

Prepares profit or loss statements using both marginal costing and absorption costing methods.

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PM – May 2021 – L2 – Q6 – Costing Systems and Techniques

Evaluate production costs per unit using both absorption and activity-based costing for Chukwukah Nigeria Limited.

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PM – Nov 2014 – L2 – Q6 – Standard Costing and Variance Analysis

Reconcile budgeted and actual gross profits for GOODLAND Limited, including variance calculations.

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PM – Nov 2020 – L2 – Q3 – Standard Costing and Variance Analysis

Reconcile budgeted and actual profit using variance analysis and evaluate fixed overheads under absorption costing.

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MI – Nov 2020 – L1 – SA – Q9 – Costing Techniques

Determine when the profit under marginal costing equals that of absorption costing.

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PM – May 2018 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate sales variances and discuss their significance in standard costing.

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MI – Nov 2014 – L1 – SB – Q2 – Costing Methods

This question requires preparing profit statements using the absorption costing approach.

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MI – Nov 2014 – L1 – SA – Q17 – Costing Methods

This question asks about the appropriate method for allocating overhead costs in product costing.

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MI – May 2022 – L1 – SB – Q3 – Costing Techniques

Prepare profit or loss statements using both absorption and marginal costing, and explain the differences.

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MI – May 2022 – L1 – SA – Q3 – Costing Methods

Condition under which variable and absorption costing produce the same profit.

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ICMA – Nov 2024 – L1 – Q1a – Marginal and Absorption Costing

Prepares profit or loss statements using both marginal costing and absorption costing methods.

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PM – May 2021 – L2 – Q6 – Costing Systems and Techniques

Evaluate production costs per unit using both absorption and activity-based costing for Chukwukah Nigeria Limited.

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PM – Nov 2014 – L2 – Q6 – Standard Costing and Variance Analysis

Reconcile budgeted and actual gross profits for GOODLAND Limited, including variance calculations.

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PM – Nov 2020 – L2 – Q3 – Standard Costing and Variance Analysis

Reconcile budgeted and actual profit using variance analysis and evaluate fixed overheads under absorption costing.

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MI – Nov 2020 – L1 – SA – Q9 – Costing Techniques

Determine when the profit under marginal costing equals that of absorption costing.

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PM – May 2018 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate sales variances and discuss their significance in standard costing.

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MI – Nov 2014 – L1 – SB – Q2 – Costing Methods

This question requires preparing profit statements using the absorption costing approach.

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MI – Nov 2014 – L1 – SA – Q17 – Costing Methods

This question asks about the appropriate method for allocating overhead costs in product costing.

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MI – May 2022 – L1 – SB – Q3 – Costing Techniques

Prepare profit or loss statements using both absorption and marginal costing, and explain the differences.

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MI – May 2022 – L1 – SA – Q3 – Costing Methods

Condition under which variable and absorption costing produce the same profit.

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