1. Sally has just forwarded an urgent email from the production manager- Marina Stanton of York Division for you to reply. Marina prepared a draft Profit and Loss account for two years- 2019 and 2020 ending on 31^st December for the internal purposes; however, the net profit figures widely vary with the one prepared for external auditor. Marina is looking for any possible explanations of the profit differences. She also does not understand why profit figures fall in 2020 in the profit statement prepared for internal purposes than the external ones when the number of sales units are expected to be higher than those of 2019.

You are unable to access both statements (internal and external) Marina prepared since your access privilege is restricted. Sally and Marine are both attending a regional meeting in which the performance of York division will be discussed and you cannot reach anyone of them by phone. You have managed to reach out Marinas secretary who has sent you some figures based on which Marina was working on.

2019 (in units) 2020 (in units)

Units produced 5,000 7,000

Opening inventory 1,500[1] ?

Closing inventory 500 1,000

Costs: () ()

Direct material 40/ unit 42/ unit

Direct labour 30/ unit 33/ unit

Variable manufacturing o/h 10/ unit 12/ unit

Variable selling & admin o/h 5/ unit 6/ unit

Fixed manufacturing o/h 220,000 per year

Selling and administrative o/h 100,000 per year

The groups policy is to make 60% contribution margin ratio and it uses FIFO inventory system across its divisions.

Compose a reply to Marina addressing her queries. You should engage appropriate management accounting tool, technique and/or concept to reach your conclusion and explain the techniques to Marina briefly. The detailed analysis with the two profit and loss statements (internal and external) can be sent to Sally and Marina as attachments to your reply so that they can verify your calculation and include them in Marinas presentation in the regional meeting. (20 marks)

[1] Product cost under absorption costing in 2018: Variable cost of goods manufactured 72 and fixed manufacturing overhead was 44