How to approach it
- Split every cost into variable and fixed, line by line, using the percentages given.
- Calculate variable cost per equivalent unit (FIFO) for material and conversion.
- Value opening and closing WIP and finished goods at variable production cost only.
- Lay out the account: sales, variable cost of sales, variable selling costs, contribution, fixed costs, profit.
Key rules to apply
- Marginal costing: inventories carry variable production cost only; all fixed production overhead is a period cost.
- Stores and spares consumed are factory overhead, not direct material.
- Depreciation and salaried staff are fixed unless told otherwise.
Answer layout
| Marginal costing P&L | Rs |
|---|---|
| Sales | |
| Opening FG at marginal cost | |
| Variable cost of goods manufactured | |
| Less closing FG | |
| Variable cost of sales | |
| Variable selling and admin | |
| Contribution | |
| Fixed production overhead | |
| Fixed selling and admin | |
| Net profit |
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Presenting scattered calculations instead of a statement (examiners' point).
- Treating depreciation or salaried indirect labour as variable.
- Putting fixed or selling costs into inventory values.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q7 without copying it.
Original practice question
Marginal costing with WIP
Variable production costs this year: material Rs 4,000,000 and conversion Rs 2,500,000; FIFO equivalent units are 100,000 for both, so Rs 65 per unit. Opening WIP (2,000 units, 50% complete) cost Rs 60,000; closing WIP is 4,000 units 25% complete. 100,000 units were completed. Opening finished goods 5,000 units at Rs 62; closing 7,000 units. Sales 98,000 units at Rs 120; variable selling cost Rs 5 per unit sold. Fixed production overhead Rs 1,500,000; fixed admin Rs 800,000.
Required: Prepare the marginal-costing profit statement.
Worked solution
| Marginal costing P&L | Rs |
|---|---|
| Sales: 98,000 × 120 | 11,760,000 |
| Opening FG | 310,000 |
| Cost of goods manufactured: 60,000 + 6,500,000 − 65,000 | 6,495,000 |
| Less closing FG: 7,000 × 65 | (455,000) |
| Variable cost of sales | (6,350,000) |
| Variable selling: 98,000 × 5 | (490,000) |
| Contribution | 4,920,000 |
| Fixed production overhead | (1,500,000) |
| Fixed admin | (800,000) |
| Net profit | 2,620,000 |
Closing WIP = 4,000 × 25% × 65 = Rs 65,000.
Answer: Net profit Rs 2,620,000.