Preparation of variable and absorption costing prot statements and comments in support of marginal costing system A manufacturer of glass bottles has been affected by competition from plastic bottles and is currently operating at between 65 and Til percent of maximum capacity. The company at present reports prots on an absorption costing basis but with the high xed costs associated with the glass container industr},r and a substantial difference between volumes and production in some months, the accountant been criticized for reporting widely different prots from month to month. To counteract this criticism. he is proposing in rture to report prots based on marginal costing and in his proposal to management lists the following reasons for wishing to change: I . Marginal costing provides for the complete segregation of xed costs, thus facilitating closer control of production costs. 2. It eliminates the distortion of interim prot statements which occur when there are seasonal uctuations in sales volume although production is at a fairly constant level. 3. It results in cost information which is more helpful in determining the sales policy necessary to maximise prots. From the accounting records the following gures were extracted: Standard cost per gross [a gross is 144 bottles and is the cost unit used within the business}: From the accounting records the following figures were extracted: Standard cost per gross (a gross is 144 bottles and is the cost unit used within the business): RM Direct materials 8.00 Direct labour 7.20 Variable production 3.36 overhead 18.56 Total variable production cost Fixed production overhead 7.52* Total production standard 26.08 cost *The fixed production overhead rate was based on the following computations: Total annual fixed production overhead was budgeted at RM7 584 000 or RM632 000 per month. Production volume was set at 1 008 000 gross bottles or 70 per cent of maximum capacity. There is a slight difference in budgeted fixed production overhead at different levels of operating: Activity level Amount per month (per cent of maximum capacity) 50-75 632 76-90 648 91-100 656You may assume that actual fixed production overhead incurred was as budgeted. Additional information: September October Gross sold 87,000 101,000 Gross produced 115,000 78,000 Sales price, per gross RM32 RM32 Fixed selling costs (RM) 120,000 120 000 Fixed administrative costs RM80 000 RM80,000 There were no finished goods in stock at 1 September. You are required (a) to prepare monthly profit statements for September and October using (1) absorption costing; and marginal costing; (16 marks) () (b) to comment briefly on the accountant's three reasons which he listed to support his proposal. (9 marks) (Total 25 marks) CIMA past year