(9 marks) Adapted from CIMA Stage 2 Cost Accounting IM7.4 Intermediate: Calculation of overhead absorption rates and an explanation of the differences in profits. A company manufactures a single product with the following variable costs per unit: Direct materials Direct labour Manufacturing overhead R7.00 R5.50 R2.00 The selling price of the product is R36.00 per unit. Fixed manufacturing costs are expected to be R1,340,000 for a period. Fixed non-manufacturing costs are expected to be R875 000. Fixed manufacturing costs can be analysed as follows: Production 1 R380,000 Department Service General 2 department Factory R465,000 R265,000 R230,000 'General factory' costs represent space costs, for example rates, lighting and heating. Space utilisation is as follows: Production department 1 Production department 2 Service department 40% 50% 10% 198 CHAPTER 7 ABSORPTION AND VA Sixty per cent of service department costs are labour related and the remaining 40 per cent machine related. Normal production department activity is: Direct labour Machine Production hours hours units Department 1 80,000 2,400 120,000 Department 2 100,000 2,400 120,000 Fixed manufacturing overheads are absorbed at a predetermined rate per unit of production for each production department, based upon normal activity. Required: (a) Prepare a profit statement for a period using the full absorption costing system described above and showing each element of cost separately. Costs for the period were as per expectation, except for additional expenditure of R20,000 on fixed manufacturing overhead in Production Department 1. Production and sales were 116,000 and 114,000 units respectively for the period. (14 marks) (b) Prepare a profit statement for the period using marginal costing principles instead. (5 marks) (c) Contrast the general effect on profit of using absorption and marginal costing systems, respectively. (Use the figures calculated in (a) and (b) above to illustrate your answer.) (6 marks) Adapted from ACCA Cost and Management Accounting 1