Intermediate: Under/over-recovery of fixed overheads and preparation and reconciliation of absorption and variable costing profit statements

(a) Discuss the arguments put forward for the use of absorption and marginal costing systems respectively. (8 marks)

(b) The following information is available for a firm producing and selling a single product:

The overhead absorption rates are based normal activity of 240 000 units per period.
upon During the period just ended 260 000 units of product were produced, and 230000 units were sold at £3 per unit.
At the beginning of the period 40 000 units were in stock. These were valued at the budgeted costs shown above.
Actual costs incurred were as per budget.

Required:
(i) Calculate the fixed production overhead absorbed during the period, and the extent of any under/over absorption. For both of these calculations you should use absorption costing.
(ii) Calculate profits for the period using absorp¬ tion costing and marginal costing respectively.
(iii) Reconcile the profit figures which you calcu¬ lated in (ii) above.
(iv) State the situations in which the profit figures calculated under both absorption costing and marginal costing would be the same.

Transcribed Image Text:

Budgeted costs (at normal activity) (000) Direct materials and labour Variable production overhead Fixed production overhead Variable selling and administration 264 48 144 24 overhead Fixed selling and administration overhead 96