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Over the years, the managers of Hudson Manufacturing Company Limited have been using a policy of marginal costing whereby the variable costs of producing night
Over the years, the managers of Hudson Manufacturing Company Limited have been using a policy of marginal costing whereby the variable costs of producing night lamps are charged to cost units, and fixed costs of the period are written off in full against the aggregate contribution.At a meeting held with Joan Durham, Accounting Consultant, she pointed out that there are a number of drawbacks associated with using Marginal Costing one of which include the fact that it doesnt accurately represent profits. She stated that, in a marginal costing statement, since the closing stock consists only of variable costs and ignores fixed costs which could be a considerable amount this can give a distorted picture of profits to shareholders. Miss Durham has therefore suggested to the managers of Hudson Manufacturing, that they consider using absorption costing.Below are data relevant for the years ended December and December : Selling Price per unitDirect Labour Cost per unit Direct Material per unit Direct Expense per unit Variable Overheads per unit Fixed Overheads Actual Variable Selling Cost per unit Actual ProductionActual Sales$ $$ $$ $$ $$ $ $ $ $ $ On January Hudson Manufacturing Company Limited had night lamps valued at a cost of $ For both periods the company also had budgeted fixed overhead to be $ and budgeted production of night lamps; and overheads are currently absorbed on a per unit basis.Required:a Prepare an income statement using marginal costing clearing showing the treatment of inventory as well as absorption costing for the year ended December marks b Prepare an income statement using marginal as well as absorption costing for the year ended December marks c Prepare reconciliation between both profits for both years
Over the years, the managers of Hudson Manufacturing Company Limited have been using a policy of marginal costing whereby the variable costs of producing night lamps are charged to cost units, and fixed costs of the period are written off in full against the aggregate contribution.At a meeting held with Joan Durham, Accounting Consultant, she pointed out that there are a number of drawbacks associated with using Marginal Costing one of which include the fact that it doesnt accurately represent profits. She stated that, in a marginal costing statement, since the closing stock consists only of variable costs and ignores fixed costs which could be a considerable amount this can give a distorted picture of profits to shareholders. Miss Durham has therefore suggested to the managers of Hudson Manufacturing, that they consider using absorption costing.Below are data relevant for the years ended December and December : Selling Price per unitDirect Labour Cost per unit Direct Material per unit Direct Expense per unit Variable Overheads per unit Fixed Overheads Actual Variable Selling Cost per unit Actual ProductionActual Sales$ $$ $$ $$ $$ $ $ $ $ $ On January Hudson Manufacturing Company Limited had night lamps valued at a cost of $ For both periods the company also had budgeted fixed overhead to be $ and budgeted production of night lamps; and overheads are currently absorbed on a per unit basis.Required:a Prepare an income statement using marginal costing clearing showing the treatment of inventory as well as absorption costing for the year ended December marks b Prepare an income statement using marginal as well as absorption costing for the year ended December marks c Prepare reconciliation between both profits for both years
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