Lahore Ltd commenced operations on 1 June and makes a single product, which sells for $14 per unit. In the first two months of operations, the following results were achieved:

Production output: June 6,000 July 6,000 (number of units)

Sales volume: June 4,000 July 5,000 (number of units)

Opening inventories: June --- July 2,000 (number of units)

Closing inventories: June 2,000 July 3,000 (number of units)

The fixed manufacturing cost is $18,000 per month and variable manufacturing cost is $5 per unit. There is also a monthly fixed non-manufacturing cost (marketing and administration) of $5,000. There was no work in progress at the end of either June or July.

Required:

a)Calculate operating profit for each month, first using a marginal costing approach and then a full (absorption) costing approach. (10 marks)

b)Explain the reason behind change in profit under variable and absorption costing. (2 marks)