MARGINAL & ABSORPTION COSTING AND PRICING

COST ACCOUNTING 2 – MODULE 2 (CTAC221/ CACC221)
MARGINAL & ABSORPTION COSTING AND PRICING
DECISIONS ASSIGNMENT

ASSIGNMENT OBJECTIVES:
1. The main objective of the assignment is for the student to demonstrate their
ability to understand a simulated Marginal & Absorption Costing and Pricing
Decisions.
2. In addition, the assignment meets the following critical cross-filed outcomes:
2.1Identifying and solving problems, which responses display that responsible
decisions using critical and creative thinking have been made.
2.2 Organising and managing oneself and one’s activities responsibility and
effectively.
2.3 Collecting, analysing, organising and critically evaluating information
2.4 Communicating effectively using visual, mathematical and/or language skills
in the modes of oral and/or written persuasion.
2.5 Demonstrating an understanding of the world as a set of related systems by
recognising that problem-solving contexts do not exist in isolation.
Dear student,
Please follow the following guidelines regarding the Assignments:
– Download this question paper and work thought both questions in section one
(Marginal & Absorption Costing) and section two (Pricing Decisions)
starting from 9am Tuesday 13th October 2020.
– The actual assignment will be conducted on the moodle from 9am
Wednesday 14th October 2020 to 9am Thursday 15th October 2020. You
have 24 hours in which you can take the assignment online.
– The assignment has a varies of testing styles including multiple choice
question, matching answers and fill in the blank.
– Please use a secure networks to take the assignment. Once you start the
assignment you have to complete and submit. You have two attempts to do
this assignment, with your last attempt being the mark captured. Even if your
last attempt is the lower mark.
COST ACCOUNTING II ( module 2) p Assignment
Section 1: Marginal and Absorption Costing (25 Marks)
PART A: Multiple choice questions (5 Marks)
1.1 When inventory level decreases, the direct costing that reported would be?
A. Lower profit
B. Higher profit
C. Average profit
D. Normal profit
E. None of the above
1.2 In ______________, fixed production costs are written off as they are incurred
and treated as period costs.
A. Variable costing method
B. Absorption costing method
C. Fixed costing method
D. Direct material costing method
E. Indirect and direct costing methods
1.3 What are the costs component of an Absorption costing system?
A. Variable and fixed cost
B. Direct material and labour costs
C. Variable manufacturing overhead costs
D. Direct and indirect cost
E. All of the above
1.4 In August last month, when a company had an opening inventory of 8000 units,
the closing inventory is 2000 units and absorption costing profit of R33 000. The
fixed production overhead absorption rate calculated in July and August is
R4,95 and R10 per unit respectively.
What would be the profit under marginal costing?
A. R52 600
B. R70 500
C. R29 600
D. R20 500
E. Impossible to calculate without more information
1.5 The following information is available for the first quarter of the year.

The absorption costing profit for the first quarter of the year would be :
A. R1 120
B. R1 400
C. R662.22
D. R24 880
E. Impossible to calculate without more information
Part B (Section 1: Marginal and Absorption Costing) (20 Marks)
Clicks is a South Africa based pharmaceutical companies that have been operating
for more than three decades. Due to an increase in the demand for Zinc drugs during
the recent COVID-19 pandemic, the company decides to establish a large factory to
produce 50mg dosage locally. The company started its operation in May 2020 and
supplies the product to all its retail stores nationwide and other pharmaceutical
companies in neighbouring SADC countries.
The unit cost information for Zinc drugs during the months of production is as follows:
R

Variable selling and distribution is 5% of monthly sales.
The following additional information is available for the three months of operation:

The management decided to set a selling price of R21 per unit for the product during
these three months due to economic hardship caused by the COVID-19 pandemic and
in support of the health department to reduce the high death rate of coronavirus in
South Africa. The company increases direct labour cost and variable factory overhead
in June by 20% and another 10% in July in support of the frontline workers. The fixed
manufacturing cost per units is based on predetermined absorption rates established
at the normal activity of 20 000 production units for each month. The company uses
the first in first out (FIFO) method to valuate its inventory.
Required
1. Calculate cost per unit of marginal and absorption costing for the month of June
and July (2)
2. Calculate the number of units on hand at the end of June and July (2)
3. Prepare income statement to identify the profit in June and July using:

Section 2: Pricing Decision (25 Marks)
Part A: Multiple choice question (5 Marks)
1.1 According to this pricing approach, a mark-up is added to the cost to arrive at
the selling price:
a) Profit maximisation
b) Cost plus pricing
c) Target costing
d) Contribution margin
1.2 According to this pricing approach, a selling price will be set at a point where
marginal revenue equals marginal costs.
a) Profit maximisation
b) Cost plus pricing
c) Target costing
d) Contribution margin
1.3 The greatest advantage of the ________ pricing method is that marketing
factors and customer research plays a crucial role in determining the selling
prices.
a) Profit maximisation
b) Cost plus pricing
c) Target costing
d) Contribution margin
1.4 The ___________ pricing method is recommended for short term decision
making as it excludes the fixed uncontrollable costs in the calculation of
selling prices.
a) Profit maximisation
b) Cost plus pricing
c) Target costing
d) Contribution margin
1.5 In this pricing approach, a selling price is set that will achieve a predetermined
return on capital employed.
a) Desired rate of return
b) Target costing
c) Contribution margin
d) Profit maximisation (5)
Part B (Section 2: Pricing Decision) (20 Marks)
BulletProof LTD is a well-established company that was founded by Mr Shooter in the
early 1980s. The company specializes in the manufacturing of a specific style of a
bulletproof vest but this vest is manufactured in various sizes. The company’s current
pricing strategy is to calculate the selling price based on the profit maximization policy.
Market research has indicated that the company’s sales volume could increase
steadily by adjusting the sales price.
The sales director presented the following information at a management meeting at
the end of September 2020:

The following figures were also presented by the cost accountant at the meeting:

Fixed factory overheads were R160 000 for all levels of output.
REQUIRED:
1.Prepare a schedule presenting the projected profit performance using the company’s
current pricing policy. Also indicate the most profitable option. (11)
2.Suppose the company produces 20 000 units with their current assets totalling R140
000 and the non-current assets totalling R220 000. Their desired rate of return is 20%.
Calculate the selling price per unit. (5)
3. Calculate the rate of return for the next financial period, if the net profit is expected
to be R168 000 and the total assets increase by 20%. (4)