QUESTION ONE

The following information relates to the only product manufactured and sold by

Namwela limited.

K per Unit

Selling price 50

Direct Material cost 14

Direct labour cost 16

Variable production overhead 10

Fixed production overhead 1.80

Variable sales and marketing overhead 1.00

The following level of activity took place over the first two years of the product's life:

Sales ( units) production ( units)

Year 1 13,000 14,000

Year 2 12,500 11,500

ADDITIONAL INFORMATION

1. Budgeted fixed production in units for both Year 1 and Year 2 was 12,000.

2. Actual fixed production overhead was K22,000 in both year 1 and year 2.

3. Actual fixed sales and marketing overhead was K10,000 in both periods.

4. There is no opening inventory in year 1 and all variable costs were as per

budget for the two years.

Required

1. On the assumption that Namwela used an absorption costing system,

calculate the under/over absorption

2. Prepare profit statements for each year using each of the following bases:

(a) Absorption costing

(b) Marginal costing

3. Reconcile the difference in the reported profit under the two (2) bases for

each year.