Question One

Melbourne Ltd commenced operations on 1^st May and makes a single product, which sells for $14 per unit. In the first two months of operations, the following results were achieved:

Particulars	May (number of units)	June (number of units)
Production out put	6000	6000
Sales volume	4000	5000
Opening inventories	-	2000
Closing inventories	2000	3000

Manufacturing overhead cost is %18,000 per month and the direct manufacturing cost is $5 per unit. There is also a monthly non-manufacturing overhead cost (marketing and administration) of $5,000. There was no work in progress at the end of either May or June. Melbourne Ltds direct costs are all variable and all overheads are fixed.

Required:

(a) Calculate operating profit for each month first using a variable cost approach and then using absorption costing approach.

(b)Prepare a numerical reconciliation and provide an explanation of the difference between total operating profits under variable costing and absorption cost.