Question $1$

At the start of period one Tommy has no opening inventories. Tommy sells his

product for $12$ per unit incurring the following unit variable costs:

$$

Direct materials $4\mathrm{.}80$

Direct labour $2\mathrm{.}00$

Variable production overheads $1\mathrm{.}20$

Fixed production overheads are $3,000,$ fixed selling overheads are $1,000,$ and

production and sales are as follows:

Pd $1$ Pd $2$

Sales $1200$ units $1800$ units

Production $1400$ units $1600$ units

Overhead absorption rates are calculated based on budgeted production of $1500$

units.

Required:

a$)$ Prepare profit statements using marginal costing $(9$ marks$)$

b$)$ Prepare profit statements using absorption costing $(12$ marks$)$

c$)$ Explain why the profit figures differ using the two different methods.

$(6$ marks$)$

d$)$ Explain why the adjustment is necessary for under and over absorption of

overheads in the absorption costing model. $(6$ marks$)$

$($Total $33$ marks