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Alpha Ltd (Alpha) produces and sells a single product at a unit selling price of $90. The company uses a marginal costing system for internal
Alpha Ltd ("Alpha") produces and sells a single product at a unit selling price of $90. The company uses a marginal costing system for internal management reports, while the financial year-end income statements for extemal reporting purposes are based on full absorption costing The following data refer to the years ended 31 March 2020 and 2021: 2020 2021 $ $ Marginal costs per unit Direct materials 21 23 Direct labour 19 22 Marginal factory overheads 8 10 Marginal selling and administrative expenses 2 3 Fixed factory overheads 170,000 180,000 Units Units Opening stock 1,500 2,000 Closing stock 2,000 1,500 Sales 20,000 25,000 The normal volume used for the purpose of absorption costing is 28,000 units in both years. The company uses the first-in first-out assumption for the calculation of cost of sales. Required: (a) Prepare interal management income statement for the year ended 31 March 2021 using marginal costing (20 marks) (6) Prepare a draft income statement for the year ended 31 March 2021 using full absorption costing. (20 marks) Explain the difference between income reported using absorption costing (6) and that using marginal costing (a). Justify your explanation with a brief computation. (10 marks)
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