Laying it all out | AccountingWEB

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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Speak to your tutor

ShirleyM |
ShirleyM's picture

I have

Russs |

Re-read the question, I found

James-IAS |
James-IAS's picture

I have done that a fair few times heh

Russs |