Topic: Marginal Costing and Absorption Costing

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ICMA – Nov 2024 – L1 – Q4b – Day-Rate Incentive Scheme Calculation

Calculates the cost per unit for both low and high day-rate incentive schemes.

Question

Amanda LTD – Day-Rate Incentive Scheme
Amanda LTD is a manufacturing company and its management is considering the introduction of a high day-rate incentive scheme. During one of such production periods, record shows that, if an employee makes 100 units in a 40-hour week, the employee is paid GH¢2 per hour, but if 120 units are made, the employee is paid GH¢2.50 per hour. Production overhead is added to cost at the rate of GH¢2 per direct labour hour.

Required:
i) What is the cost per unit for the low day-rate scheme?
ii) What is the cost per unit for the high day-rate scheme?

Answer

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Tags: Cost Calculation, Day Rate Scheme, Incentive Scheme
Level: Level 1

Topic: Marginal Costing and Absorption Costing
Series: Nov 2024

ICMA – Nov 2024 – L1 – Q1a – Marginal and Absorption Costing

Prepares profit or loss statements using both marginal costing and absorption costing methods.

Question

Profit or Loss Statement using Marginal and Absorption Costing
The following data has been extracted from the operating records of Agongon LTD for the last two quarters of the year to 31 December, 2023:

Quarter	3	4
Production units	8,400	10,200
Sales units	6,600	11,400

GH¢
Selling price per unit 120
Variable manufacturing cost per unit:

Direct material cost 24
Direct labour cost 18
Variable overheads 12

Fixed production overheads are budgeted at GH¢144,000 for a budgeted production of 9,600 units per quarter. These overheads are absorbed on a per-unit production basis.

Non-production overheads comprised:

Fixed administration expenses of GH¢48,000 per quarter
Selling and distribution expenses 10% of sales.

Required:
Prepare a statement of profit or loss for each quarter using:
a) The Marginal Costing technique
b) The Absorption Costing technique

Answer

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Tags: Absorption Costing, Financial Reporting, Marginal Costing, Profit, Variance
Level: Level 1

Topic: Marginal Costing and Absorption Costing
Series: Nov 2024

IMAC – NOV 2023 – L1 – Q1 – Marginal Costing and Absorption Costing

Prepare profit statements for January and February 2023 using marginal costing and absorption costing methods.

Question

Alokome Plc is a company that produces and sells one product “Iga”. Information relating to the operations of Alokome Plc for the first two months of 2023 is as follows:

i) Iga sells for GH₵500 per unit.
ii) There were no inventories of Iga at the end of December 2022.
iii) Other relevant information is as follows:

Cost Element	GH₵
Direct material and wages	220
Variable production overhead	30

Budgeted and actual costs per month:

Cost Element	GH₵
Fixed production overhead	990,000
Fixed selling and administrative expenses	400,000
Variable selling expenses	12.5% of sales

Normal capacity: 110,000 units per month

Number of units produced and sold:

Month	Sales (units)	Production (units)
January	128,000	140,000
February	110,000	102,000

Required:
Using the information above, prepare in a columnar form profit statements for January and February 2023 using:
a) Marginal costing (10 marks)
b) Absorption costing (10 marks)

Answer

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Tags: Absorption Costing, Marginal Costing, Over/Under Absorption, Profit Statement
Level: Level 1

Topic: Marginal Costing and Absorption Costing
Series: NOV 2023

IMAC – JULY 2023 – L1 – Q2 – Budgeting | Marginal Costing and Absorption Costing

Explain types of budgeting and prepare a flexible budget for cost control, including variance analysis.

Question

a) Explain the following:
i) Incremental Budgeting (2 marks)
ii) Zero-Based Budgeting (2 marks)
iii) Activity-Based Budgeting (2 marks)

b) Cox Ltd is a manufacturing company that produces a body shaping drink for the African market. The company employs a marginal costing system as an integral part of its reporting systems. During the reporting period, there was no opening or closing inventory. The company produces its budgeted and actual results for December 31, 2022, as follows:

	Budget	Actual
Production/sales (units)	2,000	1,400
Sales (GH¢)	60,000	42,400
Variable Costs:
Direct material (GH¢)	(20,000)	(13,200)
Direct labour (GH¢)	(10,000)	(7,600)
Variable overhead (GH¢)	(6,000)	(4,400)
Contribution (GH¢)	24,000	17,200
Fixed cost (GH¢)	(20,000)	(20,800)
Net profit/loss (GH¢)	4,000	(3,600)

Required:
Prepare a budget that will be useful for management cost control purposes and briefly comment on the company’s performance in December 2022. (14 marks)

Answer

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Tags: Activity Based Budgeting, Cost Control, Flexible Budget, Incremental Budgeting, Zero-Based Budgeting
Level: Level 1

Topic: Budgeting, Marginal Costing and Absorption Costing
Series: JULY 2023

IMAC – MAR 2023 – L1 – Q3 – Marginal Costing and Absorption Costing | Scope of Management Accounting

Explain qualities of management accounting information, and differences between marginal and absorption costing.

Question

a) Management accounting systems obtain information from both internal and external sources. Cost accounting system is one major source of management accounting information, and such information is only useful to managers if it possesses certain qualities.

Required:
In reference to the statement above, explain FIVE (5) qualities of management accounting information.
(10 marks)

b) Explain the following briefly:
i) Cost center (2.5 marks)
ii) Profit center (2.5 marks)

c) Explain TWO (2) differences between a marginal costing system and an absorption costing system.
(5 marks)

Answer

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Tags: Absorption Costing, Cost Center, Management Information, Marginal Costing, Profit Center
Level: Level 1

Topic: Marginal Costing and Absorption Costing, Scope of Management Accounting
Series: MAR 2023

IMAC – DEC 2022 – L1 – Q1 – Budgeting | Marginal Costing and Absorption Costing

Features of a service, calculation of overhead absorption rates and production cost, addressing negative cash balances, and preparation of a flexible budget.

Question

a) Services are the non-physical, intangible parts of the Ghanaian economy, as opposed to goods, which we can touch or handle. Services, such as banking, education, medical treatment, and transportation make up a significant percentage of the economy.

Required: State and explain THREE (3) features of a service. (6 marks)

b) Edwin Ltd manufactures aviation components and parts to order, and the following are budgeted overheads for the year based on normal activity levels:

Department	Budgeted overhead	Labour hours
Welding	GH¢12,000	3,000
Assembly	GH¢20,000	2,000

Selling and administration overheads are 25% of factory cost.

An order for 350 units of engine parts, Job X 01, incurred the following cost:

Material cost: GH¢24,000
Labour:
- Welding: 200 hours @ GH¢5 per hour
- Assembly: 400 hours @ GH¢2 per hour
GH¢1,000 was paid for the hiring of a special x-ray machine for testing the welds.

Required: i) Calculate the overhead absorption rate for each department. (2 marks)

ii) Calculate the production cost for Job X01. (10 marks)

iii) Calculate the total cost of Job X01. (2 marks)

Answer

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Tags: Flexible Budget, Negative Cash Balances, Overhead Absorption Rate, Production Cost, Service Features, Total Cost
Level: Level 1

Topic: Budgeting, Marginal Costing and Absorption Costing
Series: DEC 2022

IMAC – NOV 2021 – L1 – Q3 – Cost and Cost Behaviour | Marginal Costing and Absorption Costing

Explanation of different cost classifications and advantages of marginal costing over absorption costing.

Question

a) Costs may be classified in various ways according to their nature and the information needs of management.

Required:
Explain the following pairs of costs:
i) Direct and Indirect Costs (3 marks)
ii) Fixed and Variable Costs (3 marks)
iii) Controllable and Non-controllable Costs (3 marks)
iv) Production and Non-production Costs (3 marks)
v) Relevant and Irrelevant costs (3 marks)

b) QQQ Ltd has been reporting using an absorption costing technique. However, at a management retreat attended by the Cost and Management Accountant, they discussed the information usefulness of marginal costing reports for short-term decision making extensively.

Required:
Outline FIVE (5) advantages of a marginal costing system of reporting compared to absorption costing system for consideration by the management of QQQ Ltd. (5 marks)

Answer

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Tags: Controllable Costs, Direct Costs, Fixed Costs, Indirect Costs, Irrelevant Costs, Non-controllable Costs, Non-production Costs, Production Costs, Relevant Costs, Variable Costs
Level: Level 1

Topic: Cost and Cost Behaviour, Marginal Costing and Absorption Costing
Series: NOV 2021

IMAC – MAY 2021 – L1 – Q1 – Marginal Costing and Absorption Costing

Prepare profit and loss statements for QQQ Ltd using marginal and absorption costing techniques.

Question

The following data has been extracted from the operating records of QQQ Ltd for the last two quarters of the year to 31 December 2020:

Quarter	3	4
Production units	7,000	8,500
Sales units	5,500	9,500

Description	Amount (GH¢)
Selling price per unit	100
Direct material cost per unit	20
Direct labour cost per unit	15
Variable overheads per unit	10

Fixed production overheads are budgeted at GH¢120,000 for a budgeted production of 8,000 units per quarter. These overheads are absorbed on a per unit of production basis.
Non-production overheads comprised:
- Fixed administration expenses GH¢40,000 per quarter
- Selling and distribution expenses 10% of sales

Required:
a) Prepare a statement of profit or loss for each quarter using the Marginal Costing technique. (10 marks)

b) Prepare a statement of profit or loss for each quarter using the Absorption Costing technique. (10 marks)

Answer

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Tags: Absorption Costing, Marginal Costing, Profit and Loss Statement
Level: Level 1

Topic: Marginal Costing and Absorption Costing
Series: MAY 2021

IMAC – MAY 2020 – L1 – Q1 – Marginal Costing and Absorption Costing

Prepare profit or loss statements using marginal and absorption costing for Smooth Sailing Ltd.

Question

Additional information:
Fixed production overheads are budgeted to be GH¢40,000 per month for a budgeted monthly
production of 20,000 units. Production overheads are absorbed on a unit of production basis.
Required:
a) Using marginal costing principles, prepare a statement of profit or loss for the THREE (3)
months to September 2019. (10 marks)
b) Using absorption costing principles, prepare a statement of profit or loss for the THREE (3)
months to September 2019. (10 marks)

Answer

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Tags: Absorption Costing, Marginal Costing, Profit or Loss Statement
Level: Level 1

Topic: Marginal Costing and Absorption Costing
Series: MAY 2020

ICMA – Nov 2024 – L1 – Q4b – Day-Rate Incentive Scheme Calculation

Calculates the cost per unit for both low and high day-rate incentive schemes.

Question

Required:
i) What is the cost per unit for the low day-rate scheme?
ii) What is the cost per unit for the high day-rate scheme?

Answer

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Tags: Cost Calculation, Day Rate Scheme, Incentive Scheme
Level: Level 1

Topic: Marginal Costing and Absorption Costing
Series: Nov 2024

ICMA – Nov 2024 – L1 – Q1a – Marginal and Absorption Costing

Prepares profit or loss statements using both marginal costing and absorption costing methods.

Question

Quarter	3	4
Production units	8,400	10,200
Sales units	6,600	11,400

GH¢
Selling price per unit 120
Variable manufacturing cost per unit:

Direct material cost 24
Direct labour cost 18
Variable overheads 12

Fixed production overheads are budgeted at GH¢144,000 for a budgeted production of 9,600 units per quarter. These overheads are absorbed on a per-unit production basis.

Non-production overheads comprised:

Fixed administration expenses of GH¢48,000 per quarter
Selling and distribution expenses 10% of sales.

Required:
Prepare a statement of profit or loss for each quarter using:
a) The Marginal Costing technique
b) The Absorption Costing technique

Answer

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Tags: Absorption Costing, Financial Reporting, Marginal Costing, Profit, Variance
Level: Level 1

Topic: Marginal Costing and Absorption Costing
Series: Nov 2024

IMAC – NOV 2023 – L1 – Q1 – Marginal Costing and Absorption Costing

Prepare profit statements for January and February 2023 using marginal costing and absorption costing methods.

Question

Alokome Plc is a company that produces and sells one product “Iga”. Information relating to the operations of Alokome Plc for the first two months of 2023 is as follows:

i) Iga sells for GH₵500 per unit.
ii) There were no inventories of Iga at the end of December 2022.
iii) Other relevant information is as follows:

Cost Element	GH₵
Direct material and wages	220
Variable production overhead	30

Budgeted and actual costs per month:

Cost Element	GH₵
Fixed production overhead	990,000
Fixed selling and administrative expenses	400,000
Variable selling expenses	12.5% of sales

Normal capacity: 110,000 units per month

Number of units produced and sold:

Month	Sales (units)	Production (units)
January	128,000	140,000
February	110,000	102,000

Required:
Using the information above, prepare in a columnar form profit statements for January and February 2023 using:
a) Marginal costing (10 marks)
b) Absorption costing (10 marks)

Answer

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Tags: Absorption Costing, Marginal Costing, Over/Under Absorption, Profit Statement
Level: Level 1

Topic: Marginal Costing and Absorption Costing
Series: NOV 2023

IMAC – JULY 2023 – L1 – Q2 – Budgeting | Marginal Costing and Absorption Costing

Explain types of budgeting and prepare a flexible budget for cost control, including variance analysis.

Question

a) Explain the following:
i) Incremental Budgeting (2 marks)
ii) Zero-Based Budgeting (2 marks)
iii) Activity-Based Budgeting (2 marks)

	Budget	Actual
Production/sales (units)	2,000	1,400
Sales (GH¢)	60,000	42,400
Variable Costs:
Direct material (GH¢)	(20,000)	(13,200)
Direct labour (GH¢)	(10,000)	(7,600)
Variable overhead (GH¢)	(6,000)	(4,400)
Contribution (GH¢)	24,000	17,200
Fixed cost (GH¢)	(20,000)	(20,800)
Net profit/loss (GH¢)	4,000	(3,600)

Required:
Prepare a budget that will be useful for management cost control purposes and briefly comment on the company’s performance in December 2022. (14 marks)

Answer

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Tags: Activity Based Budgeting, Cost Control, Flexible Budget, Incremental Budgeting, Zero-Based Budgeting
Level: Level 1

Topic: Budgeting, Marginal Costing and Absorption Costing
Series: JULY 2023

IMAC – MAR 2023 – L1 – Q3 – Marginal Costing and Absorption Costing | Scope of Management Accounting

Explain qualities of management accounting information, and differences between marginal and absorption costing.

Question

Required:
In reference to the statement above, explain FIVE (5) qualities of management accounting information.
(10 marks)

b) Explain the following briefly:
i) Cost center (2.5 marks)
ii) Profit center (2.5 marks)

c) Explain TWO (2) differences between a marginal costing system and an absorption costing system.
(5 marks)

Answer

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Tags: Absorption Costing, Cost Center, Management Information, Marginal Costing, Profit Center
Level: Level 1

Topic: Marginal Costing and Absorption Costing, Scope of Management Accounting
Series: MAR 2023

IMAC – DEC 2022 – L1 – Q1 – Budgeting | Marginal Costing and Absorption Costing

Features of a service, calculation of overhead absorption rates and production cost, addressing negative cash balances, and preparation of a flexible budget.

Question

Required: State and explain THREE (3) features of a service. (6 marks)

b) Edwin Ltd manufactures aviation components and parts to order, and the following are budgeted overheads for the year based on normal activity levels:

Department	Budgeted overhead	Labour hours
Welding	GH¢12,000	3,000
Assembly	GH¢20,000	2,000

Selling and administration overheads are 25% of factory cost.

An order for 350 units of engine parts, Job X 01, incurred the following cost:

Material cost: GH¢24,000
Labour:
- Welding: 200 hours @ GH¢5 per hour
- Assembly: 400 hours @ GH¢2 per hour
GH¢1,000 was paid for the hiring of a special x-ray machine for testing the welds.

Required: i) Calculate the overhead absorption rate for each department. (2 marks)

ii) Calculate the production cost for Job X01. (10 marks)

iii) Calculate the total cost of Job X01. (2 marks)

Answer

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Tags: Flexible Budget, Negative Cash Balances, Overhead Absorption Rate, Production Cost, Service Features, Total Cost
Level: Level 1

Topic: Budgeting, Marginal Costing and Absorption Costing
Series: DEC 2022

IMAC – NOV 2021 – L1 – Q3 – Cost and Cost Behaviour | Marginal Costing and Absorption Costing

Explanation of different cost classifications and advantages of marginal costing over absorption costing.

Question

a) Costs may be classified in various ways according to their nature and the information needs of management.

Required:
Outline FIVE (5) advantages of a marginal costing system of reporting compared to absorption costing system for consideration by the management of QQQ Ltd. (5 marks)

Answer

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Tags: Controllable Costs, Direct Costs, Fixed Costs, Indirect Costs, Irrelevant Costs, Non-controllable Costs, Non-production Costs, Production Costs, Relevant Costs, Variable Costs
Level: Level 1

Topic: Cost and Cost Behaviour, Marginal Costing and Absorption Costing
Series: NOV 2021

IMAC – MAY 2021 – L1 – Q1 – Marginal Costing and Absorption Costing

Prepare profit and loss statements for QQQ Ltd using marginal and absorption costing techniques.

Question

The following data has been extracted from the operating records of QQQ Ltd for the last two quarters of the year to 31 December 2020:

Quarter	3	4
Production units	7,000	8,500
Sales units	5,500	9,500

Description	Amount (GH¢)
Selling price per unit	100
Direct material cost per unit	20
Direct labour cost per unit	15
Variable overheads per unit	10

Fixed production overheads are budgeted at GH¢120,000 for a budgeted production of 8,000 units per quarter. These overheads are absorbed on a per unit of production basis.
Non-production overheads comprised:
- Fixed administration expenses GH¢40,000 per quarter
- Selling and distribution expenses 10% of sales

Required:
a) Prepare a statement of profit or loss for each quarter using the Marginal Costing technique. (10 marks)

b) Prepare a statement of profit or loss for each quarter using the Absorption Costing technique. (10 marks)

Answer

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Tags: Absorption Costing, Marginal Costing, Profit and Loss Statement
Level: Level 1

Topic: Marginal Costing and Absorption Costing
Series: MAY 2021

IMAC – MAY 2020 – L1 – Q1 – Marginal Costing and Absorption Costing

Prepare profit or loss statements using marginal and absorption costing for Smooth Sailing Ltd.

Question

Answer

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Tags: Absorption Costing, Marginal Costing, Profit or Loss Statement
Level: Level 1