QUESTION FOUR

Two Left Feet Ltd manufactures a single product, the Claud. The following figures relate to the

Claud for a one-year period,

Activity level50%100%

Sales and productions (units)400800

ShsShs

Sales8,00016,000

Production costs: Variable3,2006,400

Fixed 1,600 1,600

Sales and distribution costs Variable 1,6003,200

Fixed2,4002,400

The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout

The year, and actual fixed costs are the same as budgeted. There were no stocks of Clauds at the

Beginning of the year. In the first quarter, 220 units were produced and 160 units sold.

Now:

(a) Calculate the fixed production costs absorbed by Clauds in the first quarter if absorption

costing is used,

(b) Calculate the profit using absorption costing,

(c) Calculate the profit using marginal costing,

(d) A reconciling of profits andExplain why there is a difference between the answers to (c) and (d).