Preparation of variable and absorption costing profit statements and CVP analysis R Limited is considering its plans for the year ending 31 December 2001. It makes and sells a single product, which has budgeted costs and selling price as follows:

Fixed overhead costs per unit are based on a normal annual activity level of 96000 units.
These costs are expected to be incurred at a constant rate throughout the year. Activity levels during January and February 2001 are expected to be:

Assume that there will be no stocks held on 1 January 2001.
Required:

(a) Prepare, in columnar format, profit statements for each of the two months of January and February 2001 using:
(i) absorption costing;
(ii) marginal costing. (12 marks)

(b) Reconcile and explain the reasons for any differences between the marginal and absorption profits for each month which you have calculated in your answer to

(a) above.

(c) Based upon marginal costing, calculate:
(i) the annual breakeven sales value; and (ii) the activity level, in units, which will yield an annual profit of £122 800. (4 marks)

(d) Explain three fundamental assumptions underpinning single-product breakeven analysis.

Transcribed Image Text:

Selling price Direct materials Direct labour Production overhead: variable fixed Selling overhead: variable fixed Administration overhead: fixed per unit 45 11 8 4 3 52 3