Intermediate: Explanation of variable and absorption profit calculations Rumbles ltd manufactures a single product, with a variable manufacturing cost of £12 per unit and a selling price of £20 per unit. Fixed production overheads are £90000 per period. The company operates a full absorption costing system and the fixed overheads are absorbed into the cost of production, on the basis of a normal activity of 15 000 units per period, at a rate of £6 per unit.

Any under or over absorbed overheads are written off to the profit and loss account at the end of each period. It may be assumed that no other expenses are incurred.

Summarized below are the company's manufacturing and trading results showing quantities only, for periods 2 and 3.

The managing director of Rumbles Ltd, who has recently returned from a course on marginal costing, has calculated that as sales have increased by 7 000 units in period 3, the company's profits should increase by £56000. However the results produced by the accountant show that profits in period 2 were £34 000 and in period 3 were £24000. The managing director is somewhat surprised!
Required:

(a) Produce columnar revenue accounts, for both periods, showing how the profits of £24 000 and £34 000 were obta1ned. (5 marks)

(b) Carefully explain, with supporting calculations:
(i) the reasons for the reduction in reported profits between the two periods; (5 marks)
(ii) how the managing director has calculated that profits should increase by £56 000 in period 3; (2 marks)
(iii) why profits have not increased by £56000 in period 3.

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Period 2 Period 3 (units) (units) Opening stock 5000 11000 Production 17000 13000 22000 24000 Less Closing stock 11000 6000 Sales 11000 18000