Reference no: EM132633217

At the start of period one Tommy has no opening inventories. Tommy sells his product for £12 per unit incurring the following unit variable costs:

                      £

Direct materials 4.80

Direct labour 2.00

Variable production overheads 1.20

Fixed production overheads are £3,000, fixed selling overheads are £1,000, and production and sales are as follows:

                          Pd 1               Pd 2

Sales             1200 units      1800 units

Production    1400 units     1600 units

Overhead absorption rates are calculated based on budgeted production of 1500 units.

Required:

Question a) Prepare profit statements using marginal costing

Question b) Prepare profit statements using absorption costing

Question c) Explain why the profit figures differ using the two different methods.

Question d) Explain why the adjustment is necessary for under and over absorption of overheads in the absorption costing model.