Reference no: EM132501879

RT Moris and Company is drafting a budget on the basis of the following data:

Direct Material $30 per unit

Direct Labour $15 per unit

Variable Production Expenses $6 per unit

Fixed Production Costs $50,000 per month

Normal output 10,000 units per month 60% capacity

Sales price $80 per unit

In order to build up inventory in anticipation of an increase in demand which is expected later in the year, production is to exceed sales in the first three months of the year as follows:

                        Month 1                Month 2                 Month 3

Production              7,000                10,000                 20,000

Sales                       6,000                 9,000                 10,000

Required:

Question (a) Prepare two profit statements covering each of the three months using:

i) On a marginal costing basis; and

ii) On a full absorption costing basis.

Question (b) Reconcile the difference in profit for each month and prove that both methods give you the same profits.