Woods Supply is an entity that produces wooden tables. The company currently uses a marginal costing policy; however, at a recent conference held at the K Hotel on June 15, 2021, one of the presenters spoke about the benefits of using an absorption costing policy. He stated that:

Some of the primary advantages of absorption costing are that, it is in compliance with generally accepted accounting principles (GAAP), recognizes all costs involved in production, and does a better job of accurately tracking profit during an accounting period.

The owner of Wooden Supply, Mrs. Maxine Webber, took keen note of this statement and said that she would like to learn more about these two types of accounting systems.

Below are data relevant for the years ended December 31, 2020 and December 31, 2021:

2020 2021

Selling Price per unit $7,500 $7,500

Direct Labour Cost per unit $500 $500

Direct Material per unit $750 $750

Direct Expense per unit $500 $500

Variable Overheads per unit $400 $400

Fixed Overheads (Actual) $11,500,000 $16,500,000

Variable Selling Price per unit $250 $250

Actual Production 5,000 6,000

Actual Sales 5,500 5,250

On January 1, 2021, Wooden Supply 500 chairs valued at a cost of $2,325,000. For both periods, the company also had budgeted fixed overhead to be $11,250,000 and budgeted production of 4,500 chairs. Overheads are currently absorbed on a per unit basis. In an effort to show Mrs. Webber the possible difference in profits that could arise if his company were to adopt an absorption costing policy, you are required to do the following:

(a) Prepare an income statement using marginal costing, as well as, absorption costing for the year ended December 31, 2020. (9 marks)

(b) Prepare an income statement using marginal costing, as well as, absorption costing for the year ended December 31, 2021. (9 marks)

(c) Prepare reconciliation between profits for both years. (4 marks)

(d) Discuss two differences between marginal and absorption costing. (4 marks)