Reference no: EM132540326

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         £150,000             £150,000

administrative expenses

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:

Question a) Prepare the profit and loss account for each year using Absorption costing.

Question b) Calculate what the profit would be each year if the company used Marginal costing.

Question c) Reconcile the differences between the two profit figures and explain the circumstances in which one method may be more suitable than the other.