MS Limited manufactures one product only which is sold for £100 each. There is given below a budgeted profit and loss statement for one year based on sales and production at a normal level of activity.

Budgets have been prepared for year ending 30 June, 1981 and year ending 30 June, 1982. In the budget to 30 June, 1981 sales have been shown as only 80% of the normal level of activity while production has been included at the normal level of activity. In the budget for year ending 30 June, 1982 sales have been shown as achieving the normal level of activity while production has been reduced to 80% of the normal level of activity to utilize stock made previously.

(a) You are required to prepare a budgeted profit and loss statement for each of the years ending 30 June, 1981 and 1982, based on a system of:
(0 absorption costing (it) marginal costing

(b) Discuss briefly the effect on profit of these two different systems.

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Profit and loss statement Sales 000 000 1,000 Costs: Direct material 300 Direct wages 200 Production overhead: variable fixed 200 Administration overhead: fixed 100 Selling overhead: fixed 8888 50 50 900 Net profit 100