The Sherwood Co Ltd is a single-product manufacturing company, which uses a marginal costing system for internal management purposes. The year-end external reports are converted to absorption costs. Variances are charged to the cost of goods sold.

The following data refers to the years ended 31 December 20X0 and 20X1:

The normal volume used for the purpose of absorption costing is 28,000 units in both years.
Required:

(a) Prepare profit and loss accounts for the year ended 31 December 20X1 ona marginal costing and on an absorption costing basis.

(b) Discuss any differences which you may find between these two profit and loss accounts.

(c) State what advantages and disadvantages attach to the marginal costing approach for internal management purposes.

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Sale price per unit Standard marginal costs per unit: Direct materials Direct labour Marginal factory overheads Marginal selling and administrative expenses Fixed factory overheads Opening stocks Closing stocks Sales 20X0 20X1 80 90 2862 21 23 19 22 10 3 170,000 180,000 Units Units 1,500 2,000 2,000 1,500 20,000 25,000