Computer Limited was formed three years ago to produce a single product, the ‘Mini’. The directors are receiving the financial results of the first three years presented by the company accountant, and are concerned with the decline in profits in the year 20X2 despite a substantial increase in sales.

Summarized results are shown below:

Fixed overheads are absorbed on the basis of budgeted annual production. Under- or over-absorbed overheads are charged to cost of goods sold.
Required:

(a) Prepare a statement showing the profit figures derived by the company accountant.

(b) Prepare profit and loss accounts using a marginal costing approach.

(c) Reconcile the profits calculated in parts (a) and (b) above.

(d) Explain the rationale behind the approaches adopted in parts (a) and (b).

Transcribed Image Text:

20X0 20X1 20X2 Production: Budget (units) Actual (units) Sales (units) Selling price per unit Marginal production cost per unit 1,000 1,000 1,000 900 1,100 800 800 800 1,000 80 80 80 10 10 10 Fixed production overheads 40,000 40,000 40,000 Fixed selling and administrative overheads 20,000 20,000 20,000 Net profit nil 8,000 2,000