usling principles. 15 Absorptio 7.15 Part 1, June 2004)(40 minutes] loss would b
ID: 2472093 • Letter: U
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usling principles. 15 Absorptio 7.15 Part 1, June 2004)(40 minutes] loss would be the same n vs. marginal costing. IFrom ACCA Financial Information for Management Absorption vs. marginat e Ltd is a small company manufacturing and selling two different products -the Lang and the Dale. Each product passes through two separate production cost centres- Lang an Lang anining department, where all the work is carried out on the same general purpose inery, and a finishing section. There is a general service cost centre providing facili- for all employees in the factory. The company operates an absorption costing system ties for aand have been extracted from the hection has artm extracted from the budget for the coming year: using budg machine ou budgeted overhead absorption rates. The management accountant has calculated the ine hour absorption rate for the machining department as £3.10 but a direct labour r absorption rate for the finishing section has yet to be calculated. The following data Product Sales (units) 0 6000 7 200 Production (units) 10400 Direct material cost per unit Direct labour cost per unit: - machining department (E8 per hour) - finishing section (£6 per hour) Machining department - machine hours per unit E42 Fixed production overhead costs: - machining department - finishing section - general service cost centre £183 120 E241 320 £82800 Number of employees: - machining department 14 - finishing section - general service cost centre Service cost centre costs are reapportioned to production cost centres.Explanation / Answer
1. CALCULATION OF ABSORPTION RATE FOR FINISHING SECTION: (AMOUNT IN FOUNDS)
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PARTICUALRS MACHINING FINISHING GENERAL SERVICEPRIMARY DISTRIBUTION 183,120 241M320 82800
ALLOCATION OF GENERAL SERVICE
IN THE RATIO OF (14:32:4) 23,184 52,992 6,624
APPORTIONMENT OF GENERAL SERVICE
TO MACHING & FINISHING IN 14:32 RATIO 2,016 4608 (6,624)
TOTAL FIXED OVERHEAD 208,320 298,920 --
DIRECT LABOUR HOURS FOR FINISHING DEPT
LABOUR HOURS FOR LONG (7200X6)=43,200
LABOUR HOUS FOR DATE(10400X6) = 62,400 - 105,600 HOURS
ABSORPTION RATE FOR FINISHING
SECTION (298,920/105,600) -- 2.83
2. BUDGETED TOTAL COST PER UNIT FOR THE PRODUCITON OF DATE : (PER UNIT COLUMN IN POUNDS)
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PARTICULARS PER UNIT
DIRECT MATERIAL 44.00
DIRECT LABOUR : MACHINING 40.00
FINISHING 36.00 76.00
PRIME COST 120.00
FIXED PRODUCTION OVERHEAD :
MACHINING : 208,320 X 31200/67200=96720/10400 9.30
FINISHING : 298,920 X 62400/112800=165,360/10400 15.90
TOTAL BUDGETED COST PER UNIT 145.20
3. When company changeover to Marginal costing system from Absorption costing system, total profit under Marginal costing system is less than total profit under absorption costing system because in Absorption costing system closing stock is overvalued due to inclusion of fixed overhead where as in marginal costing system, fixed overhead doesn't include in calculation of closing stock ie. Long 1200 units and Date 1400 units, hence closing stock is undervalued in marginal costing system, hence, total profit is low.
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