Computer Limited was formed three years ago to produce a single product, the Mini. The directors are receiving the financial results of the first three years presented by the company accountant, and are concerned with the decline in profits in the year 20x2

Summarised results are shown below:

20x0 20x1 20x2

Production: Budget (units) 1,000 1,000 1,000

Actual (units 900 1,100 800

Sales (units) 800 800 1,000

Selling price K80 K80 K80

Marginal production cost per unit K10 K10 K10

Fixed production overheads K40,000 K40,000 K40,000

Fixed selling and administrative overheads K20,000 K20,000 K20,000

Net profit nil K8,000 K2,000

Fixed overheads are absorbed on the basis of budgeted annual production. Under or over absorbed overheads are charged to cost of goodssold.

REQUIRED:

• Prepare a statement showing the profit figures derived by the company accountant.
• Prepare an income statement using marginal costing approach.
• Reconcile the profits calculated in parts (a) and (b) above
• Explain the rationale behind the approaches adopted in parts (a) and (b).