The Mulenga & Co. Ltd is a single-product manufacturing company, which uses a marginal costing system for internal management purposes. The year-end external reports are converted to absorption costs. Variances are charged to the cost of goods sold. The following data refers to the years ended 31 December 2020 and 2021: 2020 2021 K K Sales price per unit 80 90 Standard marginal cost per unit: Direct materials 21 23 Direct Labour 19 22 Marginal factory overheads 8 10 Marginal selling and administrative expenses 2 3 Fixed factory overheads 170,000 180,000 Units Units Opening inventory 1,500 2,000 Closing inventory 2,000 1,500 Sales 20,000 25,000 The normal volume used for the purpose of absorption costing is 28,000 units in both years. REQUIRED: Prepare profit and loss accounts for the year-ended 31 December 2021 on a marginal costing and on an absorption costing basis. Discuss any differences which you may find between these two profit and loss accounts. State what advantages and disadvantages attach to the marginal costing approach for internal management purposes.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
The Mulenga & Co. Ltd is a single-product manufacturing company, which uses a marginal costing system for internal management purposes. The year-end external reports are converted to absorption costs. Variances are charged to the cost of goods sold.
The following data refers to the years ended 31 December 2020 and 2021:
2020 2021
K K
Sales price per unit 80 90
Direct materials 21 23
Direct Labour 19 22
Marginal factory
Marginal selling and administrative expenses 2 3
Fixed factory overheads 170,000 180,000
Units Units
Opening inventory 1,500 2,000
Closing inventory 2,000 1,500
Sales 20,000 25,000
The normal volume used for the purpose of absorption costing is 28,000 units in both years.
REQUIRED:
- Prepare
profit and loss accounts for the year-ended 31 December 2021 on a marginal costing and on an absorption costing basis. - Discuss any differences which you may find between these two profit and loss accounts.
- State what advantages and disadvantages attach to the marginal costing approach for internal management purposes.
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