- 20 Marks
Question
a) Marginal costing and Absorption costing are cost management techniques used to allocate cost to the products produced for their valuation. There are differences in the operating profit when either marginal costing or absorption costing is deployed.
Required: State TWO (2) reasons that account for the differences in the operating profit under Marginal costing and Absorption costing systems. (4 marks)
b) Adam Ltd is a producer of product Wale. In a period, it produced 20,000 units and sold 18,000 units of product Wale. The selling price per unit of the output is GH¢5. In the planned production period, relevant cost and revenue data were stated as:
| GH¢ | |
|---|---|
| Sales | 100,000 |
| Production cost: | |
| Variable | 35,000 |
| Fixed | 15,000 |
| Administration and selling overhead: | |
| Fixed | 25,000 |
Required: Prepare a profit or loss statement based on the following costing systems: i) Marginal costing systems. (8 marks) ii) Absorption costing systems. (8 marks)
Answer
a) Factors causing differences in profit:
- Fixed factory overhead: Marginal costing system excludes fixed factory overhead from stock valuation, whereas absorption costing system includes fixed factory overhead into stock valuation.
- Differences in closing stock: Differences in closing stock values may cause differences in the reported profit under both marginal and absorption costing. (2 points @ 2 marks each = 4 marks)
Profit Statement (Marginal Costing):
Description GH¢ Sales (18,000 x GH¢5) 90,000 Less: Marginal cost of production: Variable production cost 35,000 Closing stock (2,000 x GH¢1.75) (3,500) Total marginal cost (31,500) Contribution 58,500 Less: Fixed production cost 15,000 Fixed selling and administration 25,000 Total expenses (40,000) Net profit 18,500 (8 marks) 
Profit Statement (Absorption Costing):
Description GH¢ Sales (18,000 x GH¢5) 90,000 Less: Production cost: Variable production cost 35,000 Fixed production cost 15,000 Closing stock (2,000 x GH¢2.50) (5,000) Total production cost (45,000) Gross profit 45,000 Less: Selling and administration overheads (25,000) Net profit 20,000 (8 marks)
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