Details of a company's first two years of operations are shown: Year 1 Year 2 Sales @ £20 £1,000,000 £1,200,000 Opening stock in units 0 5000 Units produced 55000 55000 Units sold 50000 60000 Fixed selling and administrative expenses £150,000 £150,000 The company's unit product cost is computed as follows: £ Direct materials 4 Direct labour 7 Variable manufacturing overhead 2 Fixed manufacturing overhead (£220,000/55,000 units) 4 Unit product cost 17 Required: a) Prepare a profit and loss account for each year using Absorption costing. b) Calculate what the profit would be each year if the company used Marginal costing. c) Reconcile the differences between the two profit figures and explain the circumstances in which one method may be more suitable than the other.
Details of a company's first two years of operations are shown:
|
|
Year 1 |
Year 2 |
|
|
|
|
|
Sales @ £20 |
£1,000,000 |
£1,200,000 |
|
Opening stock in units |
0 |
5000 |
|
Units produced |
55000 |
55000 |
|
Units sold |
50000 |
60000 |
|
|
|
|
|
Fixed selling and administrative expenses |
£150,000 |
£150,000 |
The company's unit product cost is computed as follows:
|
|
£ |
|
Direct materials |
4 |
|
Direct labour |
7 |
|
Variable manufacturing |
2 |
|
Fixed manufacturing overhead (£220,000/55,000 units) |
4 |
|
Unit product cost |
17 |
Required:
a) Prepare a
b) Calculate what the profit would be each year if the company used Marginal costing.
c) Reconcile the differences between the two profit figures and explain the circumstances in which one method may be more suitable than the other.
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