Marginal Costing

MA – L2 – Q54 – Transfer pricing

Calculate profits for Zora Shoes Ltd's departments under different pricing methods, evaluate an outsourcing offer, and explain transfer pricing principles.

Question

Zora Shoes Ltd sells 5,000 pairs of shoes each month through its Production/Sales department. 25% of the shoes (by number) sold require repairs which are carried out by the company’s Repairs department. The Production/Sales department collects an additional GH¢5 for each pair of shoe requiring repairs as an anticipated repair charge when the shoes are sold to customers. The following additional information is available:

	GH¢
Material	2.50
Labour	1.5 per Labour hour
Variable Overheads	0.5 per Labour hour
Fixed Overheads	1.15 per Labour hour

Each repair takes 2 labour hours and the Repairs department processes 1,250 repairs each month (5,000 pairs × 25%). The Production/Sales department sells each pair of shoe for GH¢22.

Required:
(i) Calculate the individual profits of the Production/Sales department, Repairs department and Zora Ventures if repairs are done by the repairs department of Zora Ventures at either full cost plus 20% margin on sales or at marginal cost. (8 marks)
(ii) Lee Shoe Repairs has offered to repair each pair of shoe for Zora Ventures at GH¢10.00, a price which is cheaper than what the repairs department is offering. Should Zora Ventures accept this offer? (5 marks)
(iii) Identify THREE other factors Zora Ventures should consider in finalizing the decision in (ii) above? (3 marks)
(iv) Explain TWO principles of a good transfer pricing method.

Answer

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Tags: Cost-plus pricing, goal congruence, Marginal Costing, outsourcing decision, subunit autonomy, transfer pricing
Level: Level 2

Topic: Transfer pricing

MA – L2- Q28 – Standard Costing and Variance Analysis

Calculate sales, material, and labour variances for Zest Foods Ltd. and prepare an operating statement reconciling budgeted to actual gross profit.

Question

Zest Foods Ltd., a premium food manufacturer operating out of Tamale, is reviewing operations for a three-month period of 20X8. The company operates a standard marginal costing system and manufactures one product, ZP, for which the following standard revenue and cost data per unit of product is available:

Selling price	GH¢ 12.00
Direct material A	2.5 kg at GH¢ 1.70 per kg
Direct material B	1.5 kg at GH¢ 1.20 per kg
Direct labour	0.45 hrs at GH¢ 6.00 per hour

Fixed production overheads for the three-month period were expected to be GH¢ 62,500.

Actual data for the three-month period was as follows:

Sales and production: 48,000 units of ZP were produced and sold for GH¢ 580,800
Direct material A: 121,951 kg were used at a cost of GH¢ 200,000
Direct material B: 67,200 kg were used at a cost of GH¢ 84,000
Direct labour: Employees worked for 18,900 hours, but 19,200 hours were paid at a cost of GH¢ 117,120
Fixed production overheads: GH¢ 64,000

Budgeted sales for the three-month period were 50,000 units of Product ZP.

Required:
(a) Calculate the following variances:
(i) Sales volume contribution and sales price variances;
(ii) Price, mix, and yield variances for each material;
(iii) Labour rate, labour efficiency, and idle time variances.
(b) Prepare an operating statement that reconciles budgeted gross profit to actual gross profit with each variance clearly shown.

Answer

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Tags: Labour variance, Marginal Costing, Material variance, Operating Statement, Sales variance, Standard Costing, Variance analysis
Level: Level 2

Topic: Standard costing and variance analysis

MA – L2 – Q26 – Standard Costing and Variance Analysis

Calculate standard cost sheet for Product AB using given actual costs and variances to determine standard costs and rates.

Question

Standard marginal production cost – Product AB


Direct materials	(8 kilos at GH¢1.50 per kilo)
Direct labour	(2 hours at GH¢4 per hour)
Variable production overhead	(2 hours at GH¢1 per hour)
Standard marginal production cost

Tutorial note: This problem tests your understanding of the formulae for calculating variances. Here, you are given the actual costs and the variances, and have to work back to calculate the standard cost. The answer can be found by filling in the balancing figures for each variance calculation.

Workings
Materials price variance
150,000 kilos of materials did cost
Material price variance
150,000 kilos of materials should cost
(The variance is favourable, so the materials did cost less to buy than they should have cost.)

Materials usage variance
Materials usage variance in GH¢ = GH¢9,000 (A)
Standard price for materials = GH¢1.50
Materials usage variance in kilograms = 9,000 / 1.50 = 6,000 kilos (A) kilos
18,000 units of the product did use
Material usage variance in kilos
18,000 units of the product should use

Required:
Calculate the standard cost sheet for Product AB, including:

Standard price for materials.
Standard quantity of materials per unit.
Standard time per unit for labour.
Variable production overhead rate per hour.

Answer

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Tags: Labour variance, Marginal Costing, Material Price Variance, Material Usage Variance, Overhead variance, Standard Costing, Variance analysis
Level: Level 2

Topic: Standard costing and variance analysis

MA – L2 – Q17- Standard costing and variance analysis

Reconcile actual and budgeted profit using variances for GreenLeaf Organics under marginal costing.

Question

GreenLeaf Organics, based near Tamale, makes a product – the EcoShield Spray. It is an organic alternative to chemical sprays.
For the forthcoming period, budgeted fixed costs were GH₵6,000, and budgeted production and sales were 1,300 units.
The EcoShield Spray has the following standard cost:

	GH₵
Selling price	50
Materials 5 kg × GH₵4/kg	20
Labour 3 hrs × GH₵4/hr	12
Variable overheads 3 hrs × GH₵3/hr	9

Actual results for the period were as follows:
1,100 units were made and sold, earning revenue of GH₵57,200.
6,600 kg of materials were bought at a cost of GH₵29,700, but only 6,300 kg were used.
3,600 hours of labour were paid for at a cost of GH₵14,220. The total cost for variable overheads was GH₵11,700, and fixed costs were GH₵4,000.
The company uses marginal costing and values all inventory at standard cost.

Required:
(a) Produce a statement reconciling actual and budgeted profit using appropriate variances.

(b) Assuming now that the company uses absorption costing, recalculate the fixed production overhead variances.

Answer

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Tags: Labour variance, Marginal Costing, Material variance, Overhead variance, Profit reconciliation, Sales variance, Variance analysis
Level: Level 2

Topic: Standard costing and variance analysis

MA – L2 – Q3 – Throughput Accounting

Calculate profit-maximizing output using marginal costing for two products with limited machine hours.

Question

A company based near the Blue River manufactures two products, Product A and Product B, on the same machines. Sales demand for the products exceeds the machine capacity of the company’s production department. The potential sales demand in each period is for 8,000 units of Product A and 12,000 units of Product B. Sales prices cannot be increased due to competition from other firms in the market. The maximum machine capacity in the production department is 32,000 hours in each period.
The following cost and profitability estimates have been prepared:

	Product A	Product B
Sales price	GH¢22	GH¢27
Direct materials	10	9
Direct labour and variable overhead	6	11
Contribution per unit	6	7
Machine hours per unit	1.5	2

Fixed costs in each period are GH¢90,000.
Required:
(a) Using marginal costing principles, calculate the profit-maximising output in each period, and calculate the amount of profit.

(b) Explain how throughput accounting differs from marginal costing in its approach to maximising profit.

(c) Use throughput accounting to calculate the throughput accounting ratio for Product A and for Product B. You should assume that the direct labour cost and variable overhead cost in your answer to part (a) is fixed in the short term.

(d) Using throughput accounting principles, calculate the profit-maximising output in each period, and calculate the amount of profit.

Answer

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Tags: Bottleneck Resource, Machine Hours, Marginal Costing, Profit Maximization, Throughput Accounting
Level: Level 2

Topic: Decision making techniques

Tag (SQ): Marginal Costing

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MA – L2 – Q54 – Transfer pricing

Calculate profits for Zora Shoes Ltd's departments under different pricing methods, evaluate an outsourcing offer, and explain transfer pricing principles.

MA – L2- Q28 – Standard Costing and Variance Analysis

Calculate sales, material, and labour variances for Zest Foods Ltd. and prepare an operating statement reconciling budgeted to actual gross profit.

MA – L2 – Q26 – Standard Costing and Variance Analysis

Calculate standard cost sheet for Product AB using given actual costs and variances to determine standard costs and rates.

MA – L2 – Q17- Standard costing and variance analysis

Reconcile actual and budgeted profit using variances for GreenLeaf Organics under marginal costing.

MA – L2 – Q3 – Throughput Accounting

Calculate profit-maximizing output using marginal costing for two products with limited machine hours.

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MA – L2 – Q54 – Transfer pricing

Calculate profits for Zora Shoes Ltd's departments under different pricing methods, evaluate an outsourcing offer, and explain transfer pricing principles.

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MA – L2- Q28 – Standard Costing and Variance Analysis

Calculate sales, material, and labour variances for Zest Foods Ltd. and prepare an operating statement reconciling budgeted to actual gross profit.

You're reporting an error for "MA – L2- Q28 – Standard Costing and Variance Analysis"

MA – L2 – Q26 – Standard Costing and Variance Analysis

Calculate standard cost sheet for Product AB using given actual costs and variances to determine standard costs and rates.

You're reporting an error for "MA – L2 – Q26 – Standard Costing and Variance Analysis"

MA – L2 – Q17- Standard costing and variance analysis

Reconcile actual and budgeted profit using variances for GreenLeaf Organics under marginal costing.

You're reporting an error for "MA – L2 – Q17- Standard costing and variance analysis"

MA – L2 – Q3 – Throughput Accounting

Calculate profit-maximizing output using marginal costing for two products with limited machine hours.

You're reporting an error for "MA – L2 – Q3 – Throughput Accounting"

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