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

Pd1 Pd2

Sales 1200 units 1800 units

Production 1400 units 1600 units

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

Please:

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.