Leaving Cert Accounting COSTING - Marginal: Marginal and Absorption Costing

Question

Marginal and Absorption Costing

Whelan Ltd produces a single product. The company’s profit and loss account for the year ended 31/12/2019, during which 26,000 units were produced and sold, was as follows:

Sales (26,000 units)                          € 1,040,000
Materials                                                221,000
Direct labour                                            364,000
Factory overheads                                   166,000
Administration expenses                     115,500
Selling expenses                                         87,900
Net profit                                                85,600

The materials and direct labour are variable costs.

Apart from a sales commission of 6% of sales, selling and administration expenses are fixed.

Factory overheads are mixed costs, and have behaved in the past as follows:

Year ended                       Production (units)          Factory Overheads in €
31/12/2018                            21,000                             148,500
31/12/2017                            16,400                             132,400
31/12/2016                            13,800                             123,300

Required:
(i) Calculate the variable and fixed elements of factory overheads using the high/low method.

(ii) Calculate the break-even point and margin of safety for Whelan Ltd.

(iii) Calculate the number of units that must be sold at €45 per unit to provide a profit of 15% of the sales revenue earned from these same units.

(iv) Calculate the profit Whelan Ltd would make if it reduced its selling price by 5%, increased fixed costs by 4% and increased the sales commission percentage to 7% and thereby increasing the number of units sold by 20%, with all other cost levels and percentages remaining unchanged.

(v) Explain what is meant by a step fixed cost and give an example.

(b) Aldridge Ltd, produced 15,000 units of product A during the year ended 31/12/2019. 12,000 of these units were sold at €4.20 per unit.  The production costs were as follows:

Direct materials                                    €0.70 per unit
Direct labour                                         €0.60 per unit
Variable overheads                               €0.55 per unit
Fixed overhead costs per unit                 €8,400

Required:
(i) Prepare profit and loss statements under marginal costing and absorption costing principles for Aldridge Ltd.

(ii) Outline the differences between marginal and absorption costing.
Indicate which method should be used for financial accounting purposes.
Explain your answer.

Marginal and Absorption Costing Whelan Ltd produces a single product - Leaving Cert Accounting - Question 8 - 2020

Worked Solution & Example Answer:Marginal and Absorption Costing Whelan Ltd produces a single product - Leaving Cert Accounting - Question 8 - 2020

Calculate the variable and fixed elements of factory overheads using the high/low method.

Step-by-step Calculation:

Calculate the break-even point and margin of safety for Whelan Ltd.

Calculation of Break-even Point:

Calculation of Margin of Safety:

Calculate the number of units that must be sold at €45 per unit to provide a profit of 15% of the sales revenue earned from these same units.

Calculate the profit Whelan Ltd would make if it reduced its selling price by 5%, increased fixed costs by 4% and increased the sales commission percentage to 7%.

Explain what is meant by a step fixed cost and give an example.

Prepare profit and loss statements under marginal costing and absorption costing principles for Aldridge Ltd.

Outline the differences between marginal and absorption costing.

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