Vanadium Ltd. is planning to manufacture a new chemical for use in the farming industry. The

product will be sold for $30 per unit. The company expects the following unit costs to apply to the

production of the chemical:

Material A 0.50 kilos @ $3 per kilo

Material B 0.75 kilos @ $4 per kilo

Labour 0.50 hours @ $5 per hour

Variable overhead 0.50 hours @ $8 per hour

Sales overhead $2 per unit

Fixed overheads are expected to be $15,120 per annum and will accrue evenly over the year.

Each three-month period is assumed to contain the same number of days and production and sales

units will be the same for each three-month period.

The planned production and sales levels for the first three months of 2020 are expected to be:

January February March

Production (units) 220 180 230

Sales (units) 190 200 210

The company held no inventory of raw materials or finished goods on 1 January 2020.

Assume that all costs were as budget

Required:

a) Prepare detailed forecast income statements for the month of February using each of: (6

marks)

(i) Absorption costing

(ii) Marginal costing

b) With suitable calculations, explain the reasons for difference in profit under marginal and

absorption costing methods. (3 marks)