The inventory as at 1 October 2020 was 300 units with costs as follows:

RM Variable cost 111,000 Fixed cost 39,000 150,000

The newly employed accountant opined that Dreammaker should adopt marginal costing system as fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced.

Required:

(a) Prepare the income statement for Dreammaker for the year ended 30 September 2021 using their existing absorption costing basis. (15 marks)

(b) Prepare the income statement for Dreammaker for the year ended 30 September 2021 using marginal costing basis recommended by the accountant. (9 marks)

(c) Prepare a statement to reconcile the difference in net profit/(loss) between (a) and (b). (3 marks)

(d) Explain the difference between absorption and marginal costing basis from the perspective of the treatment of fixed production overhead, inventory value and the impact of changes in inventory level to the profit/(loss). (8 marks)