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Laying it all out

This is a revision style question regarding absorption and marginal costing, a rewording of a question posted a day or two ago. I know asking for help of this kkind is frowned upon or probably is frowned upon, probably more so here of all places due to the professionals who come here. HOWEVER I have been trying this question for 3 solid days. To no avail.

Here are the costs:

Food - £7000

Stationary - £6000

Salary - £50000

Heating - £5000

Telephone - £3000

Insurance - £2000

Property expenses - £5000

Depreciation - £3000

Transport - £2000

Total - 83000

The question as it stands is: You have a budgeted income statement and expenditure budget which both assume you are working at 90% capacity. Working above 100% capacity incurs several costs:

+£400 heating

+£500 telephone

+£700 insurance

+£500 property expenses


Depreciation and  transport remain the same

Food and stationary increase linearly with capacity (I assume these are direct materials)

A secondary company is willing to take 10% of your clients. Assuming you are working at 120% capacity, calculate the additional work to said secondary company by using total absorption costing principles and marginal costing principles.

Here is what I calculated as 120% capacity:

Food - £9333..33 (7000/90%*100%)

Stationary - £8000 (6000/90%*100%)

Salary - £66500

Heating - £5400

Telephone - £3500

Insurance - £2700

Property expenses - £5500

Depreciation - £3000

Transport - £2000

Total - £105.933.33

Now, I think I have sorted them into categories of direct materials, direct labour, variable overheads and fixed overheads (not sure if correct):

Food + stationary = direct materials - 17,333.33

Labour - direct labour = 66,500

Heating + telephone + insurance + property expenses = variable overheads - 17,100

Depreciation + transport = fixed overheads - 5,000

I used those figures combined with total production over heads (everything - fixed variiable costs) to get the overhead absorption rates for prime cost direct materials and direct labour which worked out at:

Direct materials OAR - 582%

Direct labour OAR - 151%

Prime cost OAR - 121%

Now I'm lost, I dont know what to do to work out the costs of the additional 10% on the outsourced company by using absorption and marginal principles, all the costs remain the same other than the two linear variable costs in direct materials so I dont know whats going on.

I am really sorry for mucking up your forum with this stuff but I really want to do well in this exam and something like this will probably be in it.

Again, really sorry but please help.


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13th May 2012 11:06

Speak to your tutor

Your tutor can help better than anyone on here. They know what study materials you have, and can direct you to the appropriate text much better than we can.

Also, if they are not explaining things in a way you can understand, or are not pointing you in the right direction, then there may be others students struggling too. You will be helping others, as well as yourself, by raising this issue with your tutor.

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By Russs
13th May 2012 15:05

I have

He said to check a certain page in the textbook which vaguely alluded to flexed and flexible budgeting but there was no mention of absorption of marginal costing principles with regards to this, he said I would need to do further research, which I have and found little to nothing. It is such a niche question including so many things; thats the reason I am so perplexed.

Any theoretical advice would be greatly welcomed with open arms, even guidance on where to start. I by no means wish you to do it for me I wish to know how to go about doing it.


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13th May 2012 19:26

Re-read the question, I found the most useful study is past exam papers, the workbooks are largely useless.

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By Russs
14th May 2012 08:46

I have done that a fair few times heh

Made a small change to make it (in my eyes at least) more accurate. Instead of multiplying salary by 1.33 to get overtime I've changed it so that for every 1% of capacity over 100% salary is increased by 1% of the original salary multiplied by 1.33.

Not sure if this makes anything easy but it seems to add another variable cost...?

Also do semi-variable costs go in the absorption and marginal costing? Like if its an extra £499 go ovver 100% capacity but it doesnt increase alongside capacity like linear variables?

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