Intermediate: Preparation of variable and absorption costing systems and CVP analysis (a) PQ Limited makes and sells

Question:

Intermediate: Preparation of variable and absorption costing systems and CVP analysis

(a) PQ Limited makes and sells a single product, X, and has budgeted the following figures for a one-year period: image text in transcribed

Fixed costs are assumed to be incurred evenly throughout the year. At the beginning of the year, there were no stocks of finished goods. In the first quarter of the year, 55 000 units were produced and 40 000 units were sold.
You are required to prepare profit state¬ ments for the first quarter, using (i) marginal costing, and (ii) absorption costing. (6 marks)

(b) There is a difference in the profit reported when marginal costing is used compared with when absorption costing is used.
You are required to discuss the above state¬ ment and to indicate how each of the follow¬ ing conditions would affect the net profit reported (i) when sales and production are in balance at standard (or expected) volume, (ii) when sales exceed production, (iii) when production exceeds sales.
Use the figures from your answer to

(a) above to support your discussion; you should also refer to SSAP 9. (9 marks)

(c) WF Limited makes and sells a range of plastic garden furniture. These items are sold in sets of one table with four chairs for £80 per set.
The variable costs per set are £20 for manufacturing and £10 for variable selling, distribution and administration.
Direct labour is treated as a fixed cost and the total fixed costs of manufacturing, includ¬ ing depreciation of the plastic-moulding machinery, are £800000 per annum. Budgeted profit for the forthcoming year is £400000.
Increased competition has resulted in the management ofWF Limited engaging market research consultants. The consultants have recommended three possible strategies, as follows: image text in transcribed