Intermediate: Preparation of variable and absorption costing statements as a reconciliation of the profits The following budgeted
Question:
Intermediate: Preparation of variable and absorption costing statements as a reconciliation of the profits The following budgeted profit statement has been prepared using absorption costing principles:
The members of the management team are concerned by the significant change in profitability between the two six-month periods. As manage¬ ment accountant, you have analysed the data upon which the above budget statement has been produced, with the following results:
1. The production overhead cost comprises both a fixed and a variable element, the latter appears to be dependent on the number of units produced. The fixed element of the cost is expected to be incurred at a constant rate throughout the year.
2. The selling costs are fixed.
3. The distribution cost comprises both fixed and variable elements, the latter appears to be dependent on the number of units sold. The fixed element of the cost is expected to be incurred at a constant rate throughout the year.
4. The administration costs are fixed.
Required:
(a) Present the above budgeted profit statement in marginal costing format. (10 marks)
(b) Reconcile EACH of the six-monthly profit/ loss values reported respectively under mar¬ ginal and absorption costing. (4 marks)
(c) Reconcile the six-monthly profit for January to June from the absorption costing statement with the six-monthly loss for July to Decem¬ ber from the absorption costing statement.
(4 marks)
(d) Calculate the annual number of units required to break even. (3 marks)
(e) Explain briefly the advantages of using marginal costing as the basis of providing managers with information for decision making.
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