Under/over-recovery of fixed overheads and preparation and reconciliation of absorption and variable costing profit statements

(a) Discuss the arguments put forward for the use of absorption and marginal costing systems respectively. (S marks)

(b) The following information is available for a firm producing and selling a single product:

The overhead absorption rates are based upon normal activity of 240000 units per period.
During the period just ended 260000 units of product were produced, and 230000 units were sold at £3 per unit.
At the beginning of the period 40 000 units were in stock. These were valued at the budgeted costs shown above.
Actual costs incurred were as per budget.
Required:
(i) Calculate the fixed production overhead absorbed during the period, and the extent of any under-/over-absorption. For both of these calculations you should use absorption costing.
(ii) Calculate profits for the period using absorption costing and marginal costing respectively.
(iii) Reconcile the profit figures which you calculated in (ii) above.
(iv) State the situations in which the profit figures calculated under both absorption costing and marginal costing would be the same.

Transcribed Image Text:

Budgeted costs (at normal activity) (000) Direct materials and labour 264 Variable production overhead 48 Fixed production overhead 144 Variable selling and administration overhead 24 Fixed selling and administration 96 overhead