Marginal Costing - General - Problems and Solutions Part 2
Marginal Costing - General - Problems and Solutions Part 2
This article is part of a tutorial.
Tutorial Index page - Marginal Costing Basics
Problem : Marginal Cost Inventory
The following data, relating to a manufacturing company, are given for sub-questions A and B below.
At the beginning of September there was no inventory. During September 2,000 units of product X were produced, but only 1,750 units were sold. The financial data for product X for September were as follow:
$ |
|
|---|---|
| Materials | 40,000 |
| Labor | 12,600 |
| Variable production overheads | 9,400 |
| Fixed production overheads | 22,500 |
| Variable selling costs | 6,000 |
| Fixed selling costs | 19,300 |
----------- |
|
| Total cost for X for september | 109,800 |
----------- |
A The value of inventory of X at 30 September using a marginal costing approach is
- $6,575
- $7,750
- $8,500
- $10,562
| Variable Production Cost | = |
Materials cost + Labor cost + Variable production Overheads cost |
||
= |
$40,000 + $12,600 + $9,400 |
= |
$62,000 |
|
During September 2,000 units of product X were produced. |
||||
| Variable production cost per unit | = |
$62,000 / 2,000 units |
= |
$31 |
1,750 units were sold |
||||
| No. of units in inventory | Production units – Sales units |
|||
= |
2,000 – 1,750 |
= |
250 units |
|
| Marginal cost of inventory | = |
250 units x $31 |
= |
$7,750 |
Otherwise
During September 2,000 units of product X were produced, but only 1,750 units were sold.
The inventory is production 2,000 units – sales 1,750 units.
i.e. 250 units - 1/8th production is in inventory.
Marginal cost of inventory is an approximation of variable production cost of $62,000.
1/8th production in inventory = $7,750.
B. The value of inventory X at 30 September using a throughput accounting approach is
- $5,000
- $6,175
- $6,575
- $13,725
The answer is A.
In Throughput approach, values of inventory is calculated at Direct Materials cost.
Direct Materials cost = $40,000
Inventory cost in Throughput approach is $40,000 x 250/2000 = 5,000
Otherwise
Throughput approach values inventory at direct materials cost.
i.e. 1/8th of $40,000 = $5,000.
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