Accounting 201710

UKMM1043 Basic Economics, Accounting and Management

ACADEMIC YEAR 2017/2018
TRIMESTER OCTOBER 2017

TUTORIAL 5: MARGINAL COSTING AND ABSORPTION COSTING

1. Braun Painkillers Berhad makes a drug called Relief, which has a variable product cost
of RM6 per unit and a selling price of RM10 per unit. At the beginning of June 2016,
there were no opening inventory and production during the month was 20,000 units. The
fixed production overhead for the month was RM45,000.

Required:
Assuming the sales activities were: (i) 10,000 Reliefs; (ii) 15,000 Reliefs; and (iii) 20,000
Reliefs:

(a) Using the marginal costing principles, calculate the following for all three (3)
sales activities above:
Contribution per unit;
Total contribution for the month of June 2016;
Total net profit for the month of June 2016;
Cost of inventory per unit;
Total cost of closing inventory at the end of June 2016; and
Net profit per unit sold.

(b) Using the absorption costing principles, calculate the following for all three (3)
sales activities above:
Total net profit for the month of June 2016;
Cost of inventory per unit;
Total cost of closing inventory at the end of June 2016; and
Net profit per unit sold.

2. Solo Limited makes and sells a single product. The following data relate to period 1 to 4.

RM
Variable cost per unit 30
Selling price per unit 55
Fixed cost per period 6,000

Normal activity is 500 units and production and sales for the four periods are as follows:

Period 1 Period 2 Period 3 Period 4

(units) (units) (units) (units)
Sales 500 400 550 450
Production 500 500 450 500

There was no opening inventory at the start of period 1.

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Required:

(a) Prepare operating statements for EACH of the periods 1 to 4, based on marginal
costing principles.

(b) Prepare operating statements for EACH of the periods 1 to 4, based on absorption
costing principles.

(c) Comment briefly on the results obtained in each period AND in total by the two
systems.

3. Robinson Ltds costs for the current year are expected to be:

RM RM
Direct labour 600,000
Direct materials 700,000
Indirect manufacturing costs:
Variable 450,000
Fixed 50,000 500,000
Administration expenses 120,000
Selling and distribution cost 60,000
Finance cost 20,000
2,000,000

It was expected that 200,000 units would be manufactured and sold, the selling price
being RM12 each.

Suddenly during the year, two (2) enquiries were made at the same time which would
result in extra production being necessary. They were:

(a) An existing customer said that he would take an extra 10,000 units, but the price
would have to be reduced to RM10 per unit on this extra 10,000 units. The only
extra costs that would be involved would be in respect of variable costs.

(b) A new customer would take 15,000 units annually. This would mean extra
variable costs and an extra machine would have to be bought costing RM15,000
which would last for five years before being scrapped. It would have no scrap
value. Extra running costs of this machine would be RM6,000 per annum. The
units are needed for an underdeveloped country and owing to currency
difficulties, the highest price that could be paid for the units was RM9.25 per unit.

Required:

On this information, and assuming that there are no alternatives open to Robinson Ltd,
should the company accept or reject these orders? Your answer should show the relevant
operating statement to proof your decision.

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4. Deli Snacks owner is disturbed by the poor profit performance of her ice cream counter.
She has prepared the following profit analysis for the year just ended:

RM
Sales 45,000
Less: Cost of ice cream 20,000
Gross profit 25,000

Operating expenses:
Wages of counter personnel 12,000
Paper products (e.g. napkins) 4,000
Utilities (based on % of sales) 2,900
Depreciation of counter equipment and furnishings 3,000
Depreciation of building (based on % of sales) 5,000
Managers salary 6,000
Total operating expenses. 32,900

Loss on ice cream counter (7,900)

Required:

(i) Critique and revise the owners analyses as you think appropriate. Justify your
changes.

(ii) Should the owner close the counter? What other factors should she consider
before closing it?