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Hello again,

I have a company, it is currently working at 130% capacity utilising rented premises which in themselves incur added costs, costs such as lighting and heating (£600) and insurance (£300). There are other costs including a few variable linear costs but for brevity sake I'll leave them out. There is also a second company who is willing to act as an additional 20% of capacity.

I have to calculate the cost of the additional work to said secondary company via: absorption costing and marginal costing. (Its probably relevant that salary for anything over 100% is time and a third which equates to 75000)

So, do I simply (for marginal costing) add up all the costs that would be associated with working on the product in question? As there is no way to find out direct labour hours what do I do? Divide it by 10%? In the way of contribution sales the only figure I have is debtors and cash which totals out evenly at 60,000 -  FOR LAST YEAR.

Do I add all said marginal costs and minus said figure from the contribution sales, but how do I allow for the 10% of capacity that the secondary company provides?

Or have I got this all wrong?

For absorption costing I'm almost totally lost. As I'm looking to find the direct materials cost for the additional 10% for another company to provide I'm assuming I use the formula of: Absorption rate= total cost centre overheads/cost centre direct material costs... WHAT?? Arent they the same thing?

I could probably use the direct labour costs one too which is: adsorption rate= total cost centre overheads/total cost centre direct labour costs.

Urghghg this has been driving me insane. Help would be greatly appreciated.

I'm sorry that there is so much this time rather than the previous simple question.


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By Russs
10th May 2012 10:28


Yeh I dont think this is possible I dont have the number of units or labour hours or anything

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10th May 2012 11:31

Just for clarity

Is this your homework?

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By Russs
10th May 2012 11:46

Past paper

Revision for an upcoming exam, I just cant get my head around it.

I just want to know how I do it without the number of  units sold or labour costs or even the price of the unit, the only revenue information is from the previous year

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10th May 2012 12:34

And your previous question

On profit v bank balance. Was that also your homework?

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By Russs
10th May 2012 12:39

Not homework

I'm doing this of my own accord it is not homework, it is revision upon which I am myself confused.

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By Russs
12th May 2012 20:08

I've attempted

I think I’ve worked out the sorting of figures into categories which makes everything easier to look at.

I have Total production costs (direct materials, direct labour, variable production costs and fixed production costs) of 80,000. The direct materials are 20,000, direct labour 50,000, variable overheads 10,000 and fixed overheads 10,000.

How would I work out the additional costs of working at an additional 10% of capacity (if I’m currently working at 140%) by using marginal and absorption costing?

I've searched for different ways but the internet varies so widely that finding a definitive guide is difficult. I worked out the direct labour overhead absorption rate, the direct materials absorption rate and the prime cost overhead absorption rate.

What do I do with these absorption rates to get the additional costs of working an additional 10%?

Also since I dont have the number of units I also divided the costs by 100 to get the cost of each area. So, instead of £?? per unit its £?? per 1% of capacity, I'm not sure if that helps or not but I saw it somewhere.

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