Anku Ltd produces one product picnic basket. The following information is available for the third month of the year:

Production units 11,000

Sales units 9,500

Financial data:

Unit selling price 35.00

Unit cost:

Direct materials 12.00

Direct labour 8.00

Variable production overheads 5.00

Fixed production overheads 2.50

Fixed production overheads are budgeted at $25,000 per month and average production is estimated to be 10,000 units per month.

There is also a variable selling cost of 2 per unit and fixed selling cost of 4,500 per month.

Required:

Prepare a profit statement for the period using:

a) Absorption costing

(13 marks)

b) Marginal costing

(11 marks)

c) What is the difference between the profits in the two statements? Identify and briefly explain what account for the difference.