Question 18

A business enterprise has the following budgeted marginal costing profit and loss account for the month ended 31 December 2018

GHS000 GHS000

Sales 48

Cost of sales:

Opening stock 3

Production costs 36

Closing stock (7)

( 32)

16

Other variable costs:

Selling (3.2)

Contribution 12.8

Fixed costs:

Production overheads (4)

Administration (3.6)

Selling (1.2)

Net profit 4.0

The standard cost per unit is:

GHS

Direct materials (1kg) 8

Direct labour (3 hours) 9

Variable overhead (3 hours) 3

20

Budgeted selling price per unit 30

The normal level of activity is 2,000 units per month. Fixed production costs are budgeted at GHS4,000 per month and absorbed on the normal level of activity of units produced.

Required

1. Prepare a budgeted profit and loss account under absorption costing for the month ended 31 December 2018.
2. Reconcile the profits under these two methods and explain why a business may prefer to use marginal costing rather than absorption costing.