(a) From the information given below, prepare profit statements for the year based on:

(i) marginal costing

(ii) absorption costing Comment on the difference in the profit figures you report for (i) and (ii) above JB ltd produces a single product, which is bottled and sold in cases. The normal annual level of operations, on which the production fixed overhead absorption is based, is 36000 cases.

Data for the last financial year were, for cases:

Production 40000 Sales 32000 Per case

$ $

Selling price 60 Cost:

Production:

Direct labour 12 Direct materials 14 Variable overhead 8 Fixed overhead (budgeted and incurred) 216000 Selling and administrative cost:

Fixed 50000 Variable 15% of sales revenue There was no opening stock of finished goods, and the work-in-progress stock may be assumed to be the same at the end of year as it was at the beginning.

(b) For making decisions based on cost data, the distinction between fixed and variable costs is important.

REQUIRED

(i) Explain why the above statement is true

(ii) Give brief details of two problems associated with the determination of fixed and variable cost

(iii) List three types of decision where the division between fixed and variable cost is important ICMA, FS, Section A, Cost Accounting, May 1982.