MCDL Sample Assessment 1 Task 1.4

eva518

Hi

I am struggling to work out the Absorption & Marginal Costing on AQ2016 MCDL Sample Assessment 1 Task 1.4 Please help.
I just can not work out the answers at all :-(
I have attached the question below.
Many Thanks Guys

lucym96

Hi!

This should help to explain marginal and absorption costing: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki Pages/Marginal and absorption costing.aspx

So for this question, you just need to value the inventory in both ways.

For absorption costing you need to work out cost per unit by adding direct materials, direct labour, other variable prdn costs AND fixed production costs (fixed overheads are absorbed into each unit)

First work out opening inventory =
Mth 1 o/inv = 0 +10,000 - 8,000 = 2,000
Mth 2 o/inv = 2,000 + 10,000 - 9,000 = 3,000
Mth 3 o/inv = 3,000 units
As inventory is valued on a FIFIO basis, all of these units will be valued using the costs in the months that they were produced.

Then calculate cost per unit:
15 + 10 + (230,000/10,000) + (450,000/10,000)
= £93 @ 3000 units = £279000

For production costs you now need to value them using the figures in the month they were produced:
10,000 units @ 15 + 10 + (£250,000/10,000) + (£450,000/10,000)
10,000 units @ £95 = £950,000

For closing inventory:
3,000 + 10,000 - 11,000 = 2,000 units
Valued the same as above as it was produced in month 3 @ £95

Cost of sales:
Take o/inv + prdn costs - c/inv = COS
279,000 + 950,000 + 190,000 = £1,039,000

Fixed overheads = £0 as these have already been absorbed into each unit

Profit/Loss = Sales - Cost of Sales
990,000 - 1,039,000 = -£49,000
The answer says a profit of £49,000 however I calculate a loss? Not sure if I have gone wrong somewhere there or if it's yet another error on these sample assessments!

However for marginal costing you just take direct materials, direct labour and other variable prdn costs - in marginal costing the fixed costs are taken off (fixed overheads relate to the period)

I will just explain opening inventory as the rest will follow on:

o/inv = same as before 3,000 units
however this time you only value this with the variable costs
3,000 units @ 15 + 10 + 23 = £144,000

Then value production costs and closing inventory in the same way.

Cost of sales = o/inv + prdn costs - c/inv - same as before

However this time you need to add the fixed overheads, so just take the figure of £450,000

Then work out profit in the same way, but take the fixed overheads off at the end:

990,000 - 544,000 - 450,000 = -£4,000

Another loss, yet the answer says a profit of £4,000 again?

Hopefully just an error.

Sorry for the long answer, hopefully this helps!

Thanks

eva518

Thank you Lucy