1

At the start of period one Tommy has no opening inventories. Tommy sells his product for 12 per unit incurring the following unit variable costs:

Direct materials 4.80

Direct labour 2.00

Variable production overheads 1.20

Fixed production overheads are 3,000, fixed selling overheads are 1,000, and production and sales are as follows:

Pd 1 Pd 2

Sales 1200 units 1800 units

Production 1400 units 1600 units

Overhead absorption rates are calculated based on budgeted production of 1500 units.

a) Prepare profit statements using marginal costing

b) Prepare profit statements using absorption costing

c) Explain why the profit figures differ using the two different methods.

d) Explain why the adjustment is necessary for under and over absorption of overheads in the absorption costing model.

2.

Fitzgerald Limited produces and sells a single product. Budgeted results for that product, for the year ended 31 December 2012, are shown below:

Budgeted sales 10,000 units

Sales 2,000,000

Direct Materials 800,000

Direct Labour 400,000

Fixed Overheads 500,000

Total costs 1,700,000

Total Profit 300,000

a) Produce a profit statement for the year ending 31 December 2012, assuming actual sales are 12,000 units.

b) Calculate the break-even point for the year ending 31 December 2012 and the margin of safety expressed as a percentage of the original budgeted sales.

c) Calculate the revised breakeven point if a new wage settlement increases direct labour costs by 20%.

d) Assuming sales of 10,000 units are achieved, and the new wage settlement is never agreed, calculate the selling price per unit that would earn a total profit of 500,000.

e) Discuss the limitations of breakeven analysis.

3.

Bill Wilson, the financial accountant at Robson Ltd is considering implementing a standard costing system. He has asked your advice on the following:

a) Setting standards

b) Investigating variances

c) Taking corrective action on large variances

Make a short report for Bill addressing these three areas.