XYZ Ltd.carries on its business in Nairobi.The company has been reporting its profits using absorption costing system.During the financial year ended 30 September 2020, the following summary statement was provided:

Shs.

Shs.

Sales (4,000 units)

5,000,000

Production cost of sales:

Variable

3,000,000

Fixed

1,000,000

(4,000,000)

Gross profit

1,000,000

Expenses:

Variable

800,000

Fixed

800,000

(1,600,000)

Net loss

(600,000)

Currently the company is implementing strategies to improve its profitability, which are to be implemented in two phases; A and B.Each phase will cover a period of six months.

The expected production and sales in units for each of the phases are shown below:

Phase A

Phase B

Units

Units

Production

2,500

3,000

Sales

2,400

2,900

The fixed costs are expected to increase by 20% while the variable costs per unit will remain as they were in the previous period.The selling price per unit will be Shs. 1,500.

Required:

(a)Profit and loss statements for phases A and B using:

(i)Marginal costing.(5 marks)

(ii)Absorption costing(5 marks)

(b)Briefly explain the differences resulting from the two methods employed in (a) above of reporting profits.(2 marks)

(c)Reconcile the resulting difference in the reported profit under the two methods. (3 marks)