Bamspec plc. manufacture bamboo spectacle frames to meet the growing need for light, durable and low-cost spectacles. They commenced production three years ago and as a result of increasing market pressures management are currently focusing on the profitability of their production activities.

Their recently appointed managing director read an article on LinkedIn, which explained two costing techniques, absorption costing and marginal costing. As a result, he is keen to understand the affect that these two costing methods will have on Bamspec plcs profit and has asked for your assistance. The following information for the months of July and August 2022 is available:

july august

Sales (frames) 475,000 500,000

1. Bamspec plc. achieved its budgeted selling price of 1.25 per frame in each of the two months, July and August.

2. Direct material cost was 0.20 per frame, direct labour was 50% of direct material cost, and variable production overheads were 70% of direct labour cost

. 3. Bamspec plc. budgeted to produce 6,000,000 frames this year. They held 100,000 frames in inventory at the end of June, and produced 500,000 frames during July, with production increasing by 3,000 frames each month thereafter.

4. Budgeted fixed production overheads of 750,000 per annum are absorbed on a unit basis. The company incurred actual fixed production overheads of 60,000 per month.

5. Sales and marketing overhead, and office administration overhead were 75% and 60% respectively of fixed production overheads.

6. All costs remained the same as the prior year and were incurred at a constant rate throughout the year.

Requirement:

(a) Prepare a profit statement for each month (July and August) using each of the following techniques:

(i) Absorption costing; (ii) Marginal (variable) costing.