At the start of period one Mylo has no opening inventories. Mylo 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.

You are required to:

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.