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Marginal Costing – Assignment I Key factor Q.1 The following particulars are obtained from costing records of a factory. Product A Product B (per unit) (per unit) Rs. Rs. Selling Price 200 500 Material (Rs. 20 per litre) 40 160 Labour (Rs. 10 per hour) 50 100 Variable Overhead 20 40 Total Fixed Overheads –Rs. 15,000 Comment on the profitability of each product when: (a) Raw material is in short supply; (b) Production capacity is limited; (c) Sales quantity is limited; (d) Sales value is limited; (e) Only 1,000 litres of raw material is available for both the products in total and maximum sales quantity of each product is 300 units. Q.2 A manufacturer produces three products whose cost data are as follows:

Direct materials (Rs./unit)

X

Y

Z 

32.00

76.00

58.50

Hours

Hours

Hours

Direct Labour: Department.

Rate / hour (Rs.)

1

2.50

18

10 10

20

2

3.00

5

4

7

3

2.00

10

5

20

8

4.50

10.50

Variable overheads (Rs.) Fixed overheads: Rs. 400,000 per annum.

The budget was prepared at a time, when market was sluggish. The budgeted quantities and selling prices are as under: Product X Y Z

Budgeted quantity (Units) 19,500 15,600 15,600

Selling Price/unit (Rs.) 135 140 200

Later, the market improved and the sales quantities could be increased by 20 per cent for  product X and 25 per cent each for product Y and Z. The sales manager confirmed that the increased sales could be achieved at the prices originally budgeted. The production manager stated that the output could not be increased beyond the budgeted level due to the limitation of direct labour hours in department 2.

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Required: (i) Prepare a statement of budgeted profitability. (ii)

Set optimal product mix and calculate the optimal profit.

Acceptance of sales order Q.3 X Company manufactures cookware. Expected annual volume of 1,00,000 sets per  year is well below its full capacity of 1,50,000. Normal selling price is Rs. 40 per set. Manufacturing cost is Rs. 30 per set (Rs 20 variable and Rs. 10 fixed). Total fixed manufacturing cost is Rs. 10,00,000. Selling and administrative expenses are expected to be Rs. 5,00,000 (Rs. 3,00,000 fixed and Rs. 2,00,000 variable). A departmental store offers to buy 25,000 sets of Rs. 27 per set. No extra selling and administrative costs would be caused by the order. Further, the acceptance of this order will not affect regular  sales. Should the offer be accepted? Q.4 X Calculators Ltd. manufactures engineering calculators and the selling price was fixed at Rs. 400. The following are the cost particulars.

Rs. 140 40 20 20 5,00,000 per annum 30% on selling price

Direct Material Cost Direct Labour Cost Variable Factory Overhead Other Variable Cost Fixed Overhead Commission

The company was producing only 10,000 units, since the demand was only 10,000 units. However, the company has the capacity to produce another 1,000 units without any additional fixed overheads. One of the distributors offered that he would take 1,000 units in addition to his normal quota, but at a selling price of Rs. 320 per unit. He was also prepared to accept only half of his regular commission for this transaction. The Managing Director wants you as the Management Accountant to prepare a statement to the Board of Directors with your specific recommendations. Determination of selling price Q.5 A manufacturing company has an installed capacity of 1,50,000 units per annum. Its cost structure is given below: (Per unit) Rs. Variable costs 10 Labour (Minimum Rs. 1,00,000 per month) 10 Overheads 4 Fixed overheads: Rs. 1,92,300 per annum Semi-variable overheads Rs. 60,000 per annum at 75% capacity, which increases by Rs. 4,000 per annum for every 5% increase in capacity utilization for the year as a whole. The capacity utilization for the next year is estimated at 75% for three months, 80% for  six months and 90% for the remaining part of the year. If the company is planning to have a profit of 20% on the selling price, calculate the selling price per unit? Q.6 A highly skilled technician is paid Rs. 100 per hour and is fully engaged in the manufacture of a certain product which earns a contribution of Rs. 200 per hour to firm. The firm has received an order, which will require the services of the technician for 25 hours. If the material and other processing costs amount to Rs. 11,250 and mark up 20% on cost, what price should be quoted for the new order?

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CVP Analysis Q.7 A company has developed a new product. The sales volume of the new product was estimated to be between 15,000 and 20,000 units per month at a price of Rs. 20 per unit. Alternatively, if the selling price is reduced to Rs. 18 per unit, the sales volume will be between 24,000 and 36,000 units per month. If the production is maintained below 20,000 units per month, the variable manufacturing cost will be Rs. 16.50 per unit and the fixed costs Rs. 48,500 per month. If the production exceeds 20,000 units per month, the variable manufacturing cost will be reduced to Rs. 15.50 per unit, but the fixed costs will increase to Rs. 64,500 per month. The company paid Rs. 40,000 as fee for market survey and in addition incurred a cost of Rs. 60,000 in developing the new product. In the event of taking up this new line of business, it will be necessary to use the building space, which has been let out for a rental of Rs. 5,600 per month. You are required to analyze the Potential Profitability of the proposal of the company at different levels of output and make suitable recommendations relating to the price and volume of output to be set. Marginal costing v. Absorption costing Q.8 You company has a production capacity of 2,00,000 units per year. Normal capacity utilization is reckoned as 90%. Standard variable production costs are Rs. 11 per unit. The fixed costs are Rs. 3,60,000 per year. Variable selling costs are Rs. 3 per unit and fixed selling costs are Rs. 2,70,000 per year. The unit selling price is Rs. 20. In the year  just ended on 30th June 2008, the production was 1,60,000 units and sales were 1,50,000 units. The closing inventory on 30th June 2008 was 20,000 units. The actual variable production costs for the year were Rs. 35,000 higher than the standard. (i) Calculate the profit for the year: (a) by the absorption costing method, and (b) by the marginal costing method. (ii) Explain the difference in the profits. Q.9 X Fabrics manufactures quality napkins at its unit in Tirupur. The unit has a capacity of 60,000 napkins per month. Present monthly production for April is 40,000 napkins. Cost incurred for production is as below: (per unit). Direct material Rs. 6 No fixed cost Direct Labour Rs. 2 Fixed cost 75% Manufacturing overhead Rs. 4 Variable 25% Total Rs. 12 The marketing cost per unit is Rs. 7 (Rs. 5 is variable). Marketing costs include distribution costs and customer service costs. Present selling price is Rs. 22.50 p er unit Due to a strike at its existing napkin supplier, a hotel group has offered to buy 10,000 napkins from X Fabrics @Rs. 11 per napkin for the month of June. No further sales to the hotel are anticipated. Fixed manufacturing costs and marketing costs are tied to the 60,000 napkins. The acceptance of the special order is not expected to affect the selling price to regular customers. No marketing costs involved in special order. Prepare: (i) Budgeted income statement for June. (ii) Actual income statement under absorption costing for April. (iii) Should X Fabrics accept the special order from the hotel or not?

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