The management of Absent Ltd has been studying the first three years'

results of this newly formed company and are a little concerned with the figures produced. They tend to think of profits as being directly related to the volume of sales and find it confusing that for one year the reported sales are higher than those of the previous year but the reported net profit is lower.

The following figures are applicable to the years under consideration:

Actual sales (units)

Actual production (units)

19xl 36000 58000 19x2 50000 35000 19x3 60000 53000 In each of the years the estimated production volume was 45 000 units and the estimated fixed overheads were £67 500.

The selling price was £4 per unit and variable costs were £1.50 per unit for all three years.

Actual costs equalled estimated costs in all years. Selling and administrative expenses for each year were £10 000.

The company had no opening stock. The management accountant was having considerable difficulties explaining to management that fluctuations in profits resulted from differences between volume of sales and the volume of production within an accounting period, together with the system of product valuation used.

(a) Prepare income statements for Absent Ltd using marginal costing and absorption costing for each of the three years to aid the management accountant's explanation.

(b) Reconcile the net profit reported under the costing methods.

(c) Which costing method would you recommend for management decision-making purposes and why?