Question

Selling price per unit 10

Variable costs per unit:

- direct materials 2

- direct labour 3

- production overhead 1

- selling and distribution 1

Fixed costs:

- production budgeted 8000pa

- actual 8500pa

- selling and distribution 2000pa

(budgeted and actual)

Activity levels: Year 1 Year 2

Units Units

Budgeted production 4000 4000

Actual sales 4200 4000

Actual production 4400 3800

There is no opening stock in year 1.

Required:

1. Prepare profit and loss statements for each year under absorption costing principles (8 marks)
2. Prepare profit and loss statements for each year under marginal costing principles (7 marks)
3. Reconcile the profit figures. (2 marks)
4. What are the advantages and disadvantages of absorption costing? (4 marks)
5. Explain the advantages of using a marginal costing system as the basis of providing management with information for decision making (4 marks)

(Total 25 marks)