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

a. Absorption costing