Question

A.   Midsem Ltd produces a single product. The management currently uses marginal costing but is considering using absorption costing in the future. The budgeted fixed production overheads for the period are 500000. The budgeted output for the period is 2000 units. There were 800 units of opening inventory at the beginning of the period and 500 units of closing inventory at the end of the period.

Calculate the difference in the profits between the absorption costing profit and the marginal costing profits. Indicate which profit would be lower/higher than the other and by how much.                                                            [5 Marks]

 

B.   Novelties manufactures key chains for college bookstores. During 2019, the company had the following costs:

Direct materials used K31,000; Direct labour K18,000; Factory rent K12,000 Equipment deprecation – factory K2,000; Equipment depreciation – office K750; Marketing expense K2,500; Administrative expenses K40,000. 35,000 units produced were in 2019. Calculate the product cost per unit for the key chains.                                                                                           [5 marks]

 

C.   The Cotton Candy Company had the following information available regarding last year's operations: Sales (100,000 units) K200,000; Variable costs 100,000; Contribution margin 100,000; Fixed costs 50,000; Net Income 50,000. If sales were to increase by 200 units calculate the effect of this increase on net income?                                                                 [5 marks]

 

D.   Tren Tyre Ltd deals in tyres for which the following information is available:

Average usage 140 tyres per day

Minimum usage 90 tyres per day

Maximum usage 175 tyres per day

Lead time 10 – 16 days

Required: Based on this information calculate

a)    Reorder level.                                               [3 Marks]

b)    Daily excess stock level.                             [1 Mark]

c)    Safety stock level                                         [3 Marks]

d)    Reorder point                                                [3 Marks]

 

A.   Midsem Ltd produces a single product. The management currently uses marginal costing but is considering using absorption costing in the future. The budgeted fixed production overheads for the period are 500000. The budgeted output for the period is 2000 units. There were 800 units of opening inventory at the beginning of the period and 500 units of closing inventory at the end of the period.

Calculate the difference in the profits between the absorption costing profit and the marginal costing profits. Indicate which profit would be lower/higher than the other and by how much.                                                            [5 Marks]

 

B.   Novelties manufactures key chains for college bookstores. During 2019, the company had the following costs:

Direct materials used K31,000; Direct labour K18,000; Factory rent K12,000 Equipment deprecation – factory K2,000; Equipment depreciation – office K750; Marketing expense K2,500; Administrative expenses K40,000. 35,000 units produced were in 2019. Calculate the product cost per unit for the key chains.                                                                                           [5 marks]

 

C.   The Cotton Candy Company had the following information available regarding last year's operations: Sales (100,000 units) K200,000; Variable costs 100,000; Contribution margin 100,000; Fixed costs 50,000; Net Income 50,000. If sales were to increase by 200 units calculate the effect of this increase on net income?                                                                 [5 marks]

 

D.   Tren Tyre Ltd deals in tyres for which the following information is available:

Average usage 140 tyres per day

Minimum usage 90 tyres per day

Maximum usage 175 tyres per day

Lead time 10 – 16 days

Required: Based on this information calculate

a)    Reorder level.                                               [3 Marks]

b)    Daily excess stock level.                             [1 Mark]

c)    Safety stock level                                         [3 Marks]

d)    Reorder point                                                [3 Marks]

 

Answer 1

A) In marginal costing, all the fixed costs are treated as period costs, whereas under

absorption costing fixed manufacturing overheads are treated as product cost.

Total Sales in units = 800 units + 2000 units - 500 units

                                       = 2300 units

The fixed manufacturing overheads under marginal costing will be 500000 irrespective of number of units sold.

Fixed maufacturing overheads under absorption costing will be = (500000/2000) * 2300

                                 = 575000

Therefore,

profit under absorption costing will be lower by 75000

B) Total product cost=

Direct Materials K31000

Direct Labour K18000

Factory Rent K12000

Equipment depreciation-factory K2000

Total K63000

Number of units produced = 35000 units

Product cost per unit = K63000/35000

                                           = K1.8 per unit