Marginal Costing - Do you include Fixed OH?

UK Discussion in 'Exams and Studying' started by cheesus182, Dec 2, 2016.

  1. cheesus182

    cheesus182

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    Hey guys,

    sorry for the really simple question but I really need to make sure I get this right.
    I was asked to create a absorption and marginal profit statement for the following data:

    December 2014:
    Direct materials: $300
    Direct Labour: $200
    Variable Manf OH per unit: $100
    Variable distribution cost per unit: $50

    Total Fixed Manf OH = $200,000
    Total fixed Admin cost = $67,000

    Production = 1200 units
    Sales = 900 units
    Sales Prices per unit = $1000

    For the example above I got a profit of 10.895%
    Can anyone confirm that is correct?

    The more important one for me is the marginal costing one.
    Using the same data, I got a profit of 27.5%. That is without considering Fixed OH. which I think is wrong. However, if I use Fixed OH in the marginal calculation I would get a profit of 5.3% which is very low, right?

    The exercise continues into December 2015 with the following data:

    Direct materials: $300
    Direct Labour: $200
    Variable Manf OH per unit: $100
    Variable distribution cost per unit: $50

    Total Fixed Manf OH = $200,000
    Total fixed Admin cost = $67,000

    Production = 800 units
    Sales = 1000 units
    Sales price per unit = $1000

    Opening inventory would be 300, less 100 closing stock I suppose and by my calculations I got a profit of 5.802%
    Is that right?

    For the marginal costing calculation also for year 2015, I got 23.302% which again, does not include fixed OH. so I am really unsure about that.

    Can anyone explain where I went wrong here and how I include the Fixed OH in the marginal costing calculation?


    I really appreciate the help.

    Thanks!
     
    cheesus182, Dec 2, 2016
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  2. cheesus182

    Triest123 VIP Member

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    Under marginal costing, only the variable manufacturing overhead costs are treated as inventoriable costs while the fixed manufacturing overhead costs are recognised as expense.

    Marginal costing
    For the year 2014
    Sales ($1,000 x 900 ) -------------------------------------> 900,000
    Less : Variable costs of goods sold
    Opening inventory-------------------------------------------> -
    Direct materials ($300 x 1,200)--------------------------> 360,000
    Direct labour ($200 x 1,200)------------------------------> 240,000
    Variable Manuf OH ($100 x 1,200)----------------------> 120,000
    Less:Closing inventory [($300+$200+$100) x 300]-> (180,000)
    --------------------------------------------------------------------> 540,000
    Less : Variable distribution cost ($50 x 900)----------> 45,000
    Contribution----------------------------------------------------> 315,000
    Less : Fixed Manf OH---------------------------------------> 200,000
    Less : Fixed Admin cost-------------------------------------> 67,000
    Net profit ----------------------------------------------------- > 48,000
    Net Profit margin 5.3%

    For the year 2015
    Sales ($1,000 x 1,000)---------------------------------------> 1,000,000
    Less : Variable costs of goods sold
    Opening inventory----------------------------------------------> 180,000
    Direct materials ($300 x 800)--------------------------------> 240,000
    Direct labour ($200 x 800)------------------------------------> 160,000
    Variable Manuf OH ($100 x 800)----------------------------> 80,000
    Less : Closing inventory [($300+$200+$100) x 100]---> (60,000)
    -----------------------------------------------------------------------> 600,000
    Less : Variable distribution cost ($50 x 1000) -----------> 50,000
    Contribution-------------------------------------------------------> 350,000
    Less : Fixed Manf OH------------------------------------------> 200,000
    Less : Fixed Admin cost---------------------------------------> 67,000
    Net profit------------------------------------------------------------> 83,000
    Net Profit margin 8.3%
     
    Last edited: Dec 3, 2016
    Triest123, Dec 3, 2016
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  3. cheesus182

    cheesus182

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    Thanks for the reply.
    It makes sense the way you calculated it but in the question it states that for year 1, the company made a profit "close to 11%"
    It doesnt say how they calculated it though, whether with absorption costing or marginal costing.
    So would 10.895%, calculated using absorption costing be correct for year 1 and 5.8% for year 2?

    Thank you very much for the help, I really appreciate it!
     
    cheesus182, Dec 4, 2016
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