8.6 Brothers manufacture one type of high-quality ornament for the export market. The firm plans its activities three months in advance and its estimates for January, February and March 1994 are as follows:

Units Stock of ornaments at 1 January Nil Ornaments produced during: January 450 February 480 March 500 Expected sales for: January 400 February 450 March 520 Unit selling price £21 Unit variable manufacturing cost £12 Manufacturing overheads per month £1,800 Fixed administrative expenses per month £600

(a) Prepare profit statements for each of the months January, February and March 1994, adopting

(i) a marginal costing approach; and

(ii) an absorption costing approach.

(14 marks)

(b) Using examples from your answer to part (a), explain why the resultant profit figures differ for each approach.

(4 marks)

(Total: 18 marks)

(ICSA, Introduction to Accounting, December 1993)