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Management Accounting Costing Methods

The document contains various management accounting problems related to absorption and variable costing, including calculations for production costs, income statements, and reconciliation statements. Each problem provides specific data for companies and requires the application of costing methods to derive unit costs and financial outcomes. The problems cover a range of scenarios, including production levels, sales, and cost structures across multiple companies.

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Mohammad Sabit
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485 views7 pages

Management Accounting Costing Methods

The document contains various management accounting problems related to absorption and variable costing, including calculations for production costs, income statements, and reconciliation statements. Each problem provides specific data for companies and requires the application of costing methods to derive unit costs and financial outcomes. The problems cover a range of scenarios, including production levels, sales, and cost structures across multiple companies.

Uploaded by

Mohammad Sabit
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

BBA VISION

Management Accounting
Absorption & Variable Costing
Problem – 1 [NU-(Hon’s)-2018]
In Beta Ltd. cost of producing 34,000 units in January and 25,000 units in February were Tk. 2,49,800
and Tk. 2,18,300 respectively. The company plans to produce 18,000 units in March. How much would
be the cost of production in March?

Problem – 2 [NU-(Hon’s)-2018]
Moon Company produces a single product and has the following cost structure:
Number of units produced each year 10,000
Variable cost per unit:
Direct materials 3.00
Direct labor 3.00
Variable manufacturing overhead 2.00
Fixed cost per year:
Fixed manufacturing overhead 55,000
Fixed selling and administrative expense 20,000
Required: 1. Compute the unit product cost under variable costing.
2. Compute the unit product cost under absorption costing.
Problem – 3
During 2007, Habib Company produced 2,00,000 units (100% of normal capacity) of a product and sold
of these units. Production cost consisted of,
Direct material Tk. 3,00,000
Direct labor 4,00,000
Variable factory overhead 2,00,000
Fixed factory overhead 1,95,000
Required: Compute the per unit cost of production & ending inventory cost under variable costing and
absorption costing.

Problem – 4 [NU-BBA (Hon's.) Dept. of Finance]


You have given the following information's Rahman Brothers:
Sales price Tk. 24 per unit.
Variable manufacturing cost Tk. 10 per unit.
Variable overhead cost Tk. 4 per unit.
Fixed overhead Tk. 3 per unit (Based on capacity 10,000 units).
Fixed marketing expenses Tk. 8,000.
Production 8,000 units.
Sales 5,000 units.
Prepare income statement using absorption costing.

Problem – 5 [NU – (Hon's.) Dept. of Management – 2017]


Jamuna Corporation produced 24,000 units (normal capacity) of product during the year. 20,000 units
were sold @ Tk. 22 per unit. Cost of production was as follows:
Direct Materials Tk. 60,000
Direct Labor 60,000
Facto overhead:
Variable cost 1,20,000
Fixed cost 96,000
Marketing and administrative expense for the year TK. 70,000 all are fixed.
i. Income statement under absorption costing and variable costing.
ii. Reconciliation statement.

Problem – 6 [NU – (Hon's.) Dept. of Accounting – 2016]


Nuha Ltd. Has the following data:
Year-1 Year-2
Beginning inventory as per variable costing Nil 40,000
Beginning inventory as per absorption costing Nil 58,000
Ending inventory as per variable costing 40,000 Nil
Ending inventory as per absorption costing 58,000 Nil
Profit as per variable costing 50,000 50 000
Profit as per absorption costing 68,000 32,000
Prepare a Reconciliation statement.

Problem – 7 [NU, BBS (Hons.) 1997]


Hossain Company produces and sales a single product. Selected cost and other data for a recent year
are given below:
Opening inventory in units 0
Units produce during the year 10,000
Units sold during the year 8,000
Ending inventory in units 2,000
Selling price per unit Tk. 50
Selling and administrative costs:
Variable (per units) Tk.5
Fixed per year Tk. 70,000
Manufacturing costs / Production cost:
Variable (per unit)
Direct materials Tk. 11
Direct labor Tk. 6
Variable overhead / Factory overhead Tk. 3
Fixed per year Tk. 1,00,00
Required:
(i) Assume that the company uses absorption costing:
(a) Compute the manufacturing cost of one unit of product.
(b) Prepare an income statement for the year.
(ii) Assume that the company uses variable costing.
(a) Compute the manufacturing cost of one unit of product.
(b) Prepare an income statement for the year.
(iii) Reconcile the variable costing and absorption costing net income figures.
Problem – 8
Sky Corporation uses a standard cost system in accounting for one of its products, which it sells for Tk.
30 per unit' The standard cost per unit is:
Taka
Direct materials 8
Direct labor 7
Variable factory overhead 2
Fixed factory overhead (Normal capacity of 60,000 units). 3
Total 20
All variances are closed to cost of goods sold. On May 1, there were 10,000 units of product on hand,
During May 50,000 units were produced and 45,000 units were sold. Cost incurred during May were:
Taka
Direct materials 3,59,000
Direct labor 3,60,000
Variable factory overhead 1,05,000
Fixed factory overhead 1,85,000
Variable marketing and administrative expense 60,000
Fixed marketing and administrative expense 75,000
Required: (i) Prepare an income Statement under variable costing.
(ii) Prepare an income Statement under absorption costing.

Problem – 9 [NU-(Hon's.) Dept. of Management -2017]


The following data are for the East-West Ltd.
Particulars January February
Sales (in unit) 4,000 6,000
Production (in unit) 8,000 2,000
Sales price per unit Tk. 20 Tk. 20
Fixed facto overhead (Total) Tk. 24,000 Tk. 24,000
Selling and administrative expenses Tk. 10 Tk. 10
Direct Manufacturing cost per unit Tk. 3 Tk. 3
Fixed facto overhead per unit Tk. 8,000 Tk. 8,000
You are required to prepare comparative income statement based on absorption costing method.

Problem – 10 [NU – BBA (Hon's.) Dept. of Finance – 2016]


The following data is available for the month of April:
Beginning finished goods (in unit) 4 000
Sales (in unit) 20,000
Actual production (in unit) 24,000
Sales price per unit Tk. 30
Variable manufacturing cost: (per unit)
Direct materials Tk. 4
Direct labor TK. 3
Variable production overhead TK. 2
Fixed production overhead Tk. 50,000
Normal production (in unit) 50,000

Commercial expense (Fixed) Tk. 10,000 and variable Tk. 10,000, Administrative exp. (Fixed) Tk.
5,000.
Required:
(i) Prepare Income statement applying Variable Costing and Absorption Costing.
(ii) Prepare Reconciliation Statement:

Problem – 11 [NU-BBA (Hon’s.) – 2015]


ABC Ltd. produces a product whose related information for the year ended December 31, 2014 is as
follows:
Particulars Tk.
Beginning inventory 20,000 Units
Normal Capacity 1,00,000 Units
Production during the year 90,000 Units
Ending inventory 30,000 Units
Direct material cost per unit Tk. 20
Variable facto overhead per unit Tk. 6
Direct labor cost per unit Tk. 5
Sales price per unit Tk. 40
Annual fixed factory overhead Tk. 1,00,000
Fixed administrative and marketing expense Tk. 60,000
Variable administrative and marketing Tk. 40,000
expense
Required: Prepare an income statement for the year using and absorption costing method.

Problem – 12 [NU – BBA (Hons.) – 2014]


Tangail Ltd. produces a sin le products. Data for last year's operation are as follows:
Units produced 20,000
Variable cost per unit: Tk.
Direct materials 5.00
Direct labor 8.00
Variable manufacturing overhead 2.00
Variable selling & administrative overhead 1.00
Total Variable Cost 16.00
Fixed cost:
Fixed manufacturing overhead 80,000
Fixed selling & administrative overhead 40,000
Total Fixed Cost 1,20,000
Required: (a) Compute the unit product cost under variable costing.
(b) Compute the unit product cost under absorption costing.

Problem – 13 [NU – BBS (Hon’s.) – 2012]


Ahmed Ltd. uses absorption costing system. The president has recently heard about variable costing.
However, he supplies you the following data: –
Normal capacity 1,000 units
Beginning inventory 200 units
Production 900 units
Sales 1,000 units @ Tk. 10.00 per unit
Materials costs Tk. 2.00 per unit
Labor Tk. 2.00 per unit
Variable overhead Tk. 1.00 per unit
Fixed manufacturing expenses Tk. 2,700
Fixed selling expense Tk. 1,300
Unfavorable variable cost variance from standard Tk. 200
Required:
Income statement under:
a. Absorption costing method.
b. Variable costing method.

Problem – 14 [B.B.S (Hon’s.) N.U – 2011]


The following particulars are available from the books of Sakib & Company:
Opening inventory 2,000 units
Ending inventory 3,000 units
Production during the year 9,000 units
Normal plant capacity 10,000 units
Cost analysis:
Selling price per unit Tk. 40
Direct materials per unit 20
Direct labor per unit 6
Variable factory overhead per unit 4
Fixed factory overhead per year 10,000
Administrative and selling overhead:
Variable 4,000
Fixed 12,000
Required: i. Prepare income statement using Direct costing and Absorption costing.
ii. Reconciliation statement.
Problem – 15 [N.U. B.B.S (Hon's) 2010]
(Income statement under variable and absorption costing and Reconciliation statement)
The following data is available for the month of April: Taka
Beginning finished goods (unit). 4,000
Sales (unit). 20,000
Actual production (unit). 24,000
Sales price (per unit). 30
Variable manufacturing cost: Taka (per unit)
Direct material 4
Direct labor 3
Variable production overhead 2
Total 9
Fixed production overhead 50,000
Normal production unit 25,000
Commercial expense (fixed) Tk. 10,000 and variable 10,000. Administrative expense (fixed) Tk. 5,000.
Required: i. Prepare Income statement applying variable costing and Absorption Costing;
ii. Prepare a Reconciliation statement.

Problem – 16 [N.U. B.B.s (Hon's) 2003, 2009,N.U. 1983]


(Income statement under variable and absorption costing and Reconciliation statement)
The following particulars are available from the books of a company for the year 2012:
Sales in Kilograms: 75,000
Finished goods inventory (January 1, 2012): 12,000 Kilograms. Finished goods inventory
(December 31, 2012): 17,000 kilograms.
Sales price: Tk. 10 per unit.
Manufacturing cost:
Variable cost per kilograms of production: Tk. 4.00
Fixed factory overhead: Tk. 1,60,000 (normal capacity: 80,000 kilograms)
Marketing and administrative expenses:
Variable cost per kilogram of sales: Tk. 1.00
Fixed marketing and administrative expenses: Tk. 1,50,000
A standard costing system is used.
Required:
i. Income statement for 2012 under the absorption costing method and Variable costing
method.
ii. An account showing the difference in the difference in net operating income under the two
methods.

Problem – 17 [NU. M. Com (F) 1998, B.B.S (Hon's) 2007]


Jamuna Corporation produced 24,000 units (normal capacity) of product during the year. 20,000 units
were sold @ Tk. 22 per unit.
Cost of this production was:
Taka
Materials 60,000
Direct labor 60,000
Factory overhead:
Variable costs 1,20,000
Fixed costs 96,000
Marketing and administrative expenses for the year total 70,000; all are fixed expenses.
Required:
An income statement under absorption costing and variable costing.

Problem – 18 [NU. M. Com (F) NU. B.B.S (Hon’s.) – 2008]


(Income Statement under variable and absorption costing and Reconciliation statement)
The Sabu Company sales its razors at Tk. 3 per unit. The company uses FIFO actual costing system. A
new fixed manufacturing overhead allocation rate is computed each year by dividing the actual fixed
manufacturing overhead cost by the actual production units. The following data are related to its first
two year’s operation:
Year-1 Year-2
Units Units
Sales 1,000 1,200
Production 1,400 1,000
Cost: Taka Taka
Variable manufacturing cost 700 500
Fixed manufacturing cost 700 700
Variable marketing and administrative 1,000 1,200
Fixed marketing and administrative 400 400
Required:
i. Prepare income statement for each of the years under variable costing and under absorption
costing.
ii. Prepare a reconciliation statement explaining the difference in the operating incomes under
both methods.

Problem – 19 [ D. U. 1988 NU.2006]


A manufacturing company has the following data for 2000 and 2001:
Basic production data at standard cost:
Taka
Direct materials 1.30
Direct labor 1.50
Variable overhead 0.20
Fixed overhead (Tk. 1,50,000 + 1,509 000 units of normal volume) 1.00
Total standard factory cost 4.00
Selling price per unit 5.00
Other expenses:
Fixed selling and administration 65,000
Sales commission 4% of sales value
Output and sales in unit 2000 2001
Beginning inventory – 30,000
Production 1,70,000 1,40,000
Sales 1,40,000 1,60,000
Ending inventory 30,000 10,000
Required:
i. Prepare income statement for each Of the two years 2000 and 2001 under direct costing
and costing.

Prepared by FARHAD Sir


BBA Honour’s Dhaka College (DU)
Cell No: 01710-767025

Common questions

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Variable costing treats only variable manufacturing costs as product costs, resulting in fixed manufacturing overhead being expensed in the period incurred, whereas absorption costing includes both fixed and variable manufacturing costs as product costs, capitalizing fixed overhead into inventory. This difference affects inventory valuation and net income, with absorption costing often resulting in higher inventory values and net income when production exceeds sales .

Inventory levels influence profit reporting differently under absorption and variable costing. Under absorption costing, fixed overhead is capitalized into ending inventory, deferring expense recognition and inflating profits if production exceeds sales, as inventory absorbs overhead. Conversely, variable costing expenses all fixed overhead in the period incurred, making profit more sensitive to sales levels rather than production, thus understating profits when inventory increases .

Strategically, companies must consider reporting objectives, managerial preferences, cost behavior analysis, and performance evaluation requirements. Absorption costing is useful for external reporting and profitability analysis of product lines as it harmonizes with GAAP and IFRS, while variable costing aids in internal decision-making because it highlights contribution margins and clearly distinguishes variable and fixed costs for profit planning, variability analysis, and operating leverage assessment. Often, a hybrid approach is adopted to balance compliance and insightful internal management .

Under absorption costing, fixed manufacturing overhead is spread over the units produced, causing unit costs to fluctuate with production level changes—lower costs per unit with higher production due to fixed cost dilution. In contrast, variable costing's unit costs remain constant, as only variable costs change per unit. Thus, varying production levels impact total costs uniformly under variable costing but affect per-unit costs significantly under absorption costing .

Companies use standard costing to control and manage costs more effectively by establishing expected cost benchmarks, which facilitate variance analysis to identify deviations from expected performance. As demonstrated by Sky Corporation, actual cost data is compared with standard costs to highlight variances, which are adjusted in the financial statements to reflect true cost impacts, providing more accurate period cost accountability .

Reconciliation of income statements under both costing methods highlights differences in net income due to fixed overhead accounting. When inventory increases, absorption costing reports higher net income than variable costing due to delayed overhead expense recognition in unsold inventory. For instance, in Problem 6 with Nuha Ltd., this reconciliation shows how year-end inventory valuation under absorption raises net income compared to variable costing, which reflects total fixed costs as period expenses immediately .

Variance analysis is essential for cost control by identifying deviations between expected (standard) and actual costs, enabling prompt corrective actions. At Ahmed Ltd., standard costing facilitates this by pre-defining expected cost parameters, with variances highlighting operational inefficiencies or cost management success. Analyzing these helps management to refine operations, negotiate better terms, or adjust production processes, crucial for strategic budgeting and resource allocation .

In East-West Ltd.'s context, fixed costs per unit decrease with increased production volume as fixed costs are distributed over more units, reducing the cost burden per unit. This demonstrates economies of scale, a crucial factor in pricing strategies and capacity utilization decisions. Higher production lowers unit costs, potentially improving competitive pricing and margin management, motivating firms to optimize production to capitalize on cost efficiencies .

To predict production cost changes, key factors include variable and fixed cost components, cost behavior patterns, production volume changes, and trends over multiple periods. In Beta Ltd.'s case, such predictions require analyzing how costs varied with production in previous months and if similar conditions will persist . Analyzing per-unit costs and capacity utilization provides deeper insights into expected future costs .

In FIFO systems, inventory valuation impacts reported costs, as earlier (typically lower, given inflation) costs are matched first against revenues, often leading to higher reported profits during rising cost periods, impacting tax obligations and financial ratios. As seen in Sabu Company, fluctuating ending inventories affect cost of goods sold and, consequently, net income. Operationally, it affects cash flow projections and pricing strategies, emphasizing careful inventory level management to align financial planning and production decisions .

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