Babybox Ltd in Newcastle is a manufacturer of organic stock cubes especially made for consumption by babies from the age of 1 year. For each box of cubes, they charge 7.50. Normal demand is projected to be 100,000 boxes per year. The material cost per box is 2.68, and the labour cost is 6 per labour hour. It takes 30 minutes to produce one box of cubes.

Fixed production overheads are 30,000 per annum, and fixed administration costs are 105 per month.

There are also some variable overheads which total 0.40 per box. These variable overheads can be split as 55% production-related overheads and 45% selling overheads, the latter incurred at the point of sale.

Production of the cubes is constant all year round, but Babybox Ltd learned that there is a higher demand in the first half of the year. This is reflected in their planned production schedule as stated below:

Jul 1 - Dec 31, 2021 Jan 1 - June 30, 2022

Boxes sold 60,000 68,000

Boxes produced 75,000 50,000

The stock-take on June 30, 2021 showed that 10,000 boxes were in stock.

Management of Babybox Ltd has requested that the bi-annual profit statements for the next year be calculated using both marginal and absorption costing principles in order to allow for an adjustment of planning, if necessary.

Required:

a) Produce a profit statement for the two periods Jul - Dec 2021 and Jan - Jun 2022 using: i. Marginal Costing ii. Absorption Costing

b) draw a statement that reconciles the differences between the net profit from the marginal costing statement and adjusted profit from the absorption costing statement. Give reasons for the variance in profits.

c) Explain in which circumstances each of the costing methods from (a) and (b) should be used and the benefits of each method.