Pence Limited is a new company that manufactures facemasks for distribution in Ireland. The managing director is dissatisfied with the profit that is calculated using traditional absorption costing as a guide to monthly performance. He asks the management accountant to prepare profit statements using marginal costing for performance measurement purposes.

The management accountant has the following information for the first three months of business:

Per unit:

Sales Price 60

Direct Materials 22

Direct Labour 6

Variable Production Overhead 5

Per month:

Fixed Production Overhead 117,000

Fixed Selling Expenses 17,000

Fixed Administration Expenses 31,000

Variable Selling Expenses 10% of Sales Value

Normal Capacity 13,000 units per month

October November December

Sales (units) 11,000 14,000 16,000

Production 12,000 15,000 14,500

Required:

(a) Prepare profit statements for October, November and December using Absorption Costing.

(b) Prepare profit statements for October, November and December using Marginal Costing.

(c) Explain the difference in the profits in both methods for each of the three months.