Marginal and absorption costing illustration (Group discussion)

Abhann Ltd produces a single product, a life vest. Actual costs and selling price per unit for
the past year were as follows:
Shs.
Selling price 75
Direct material 5kg@sh.5 per kg 25
Direct labour 5hrs@sh.3 per hour 15
Variable production 5 hrs@sh1 per hour 5
overhead

Actual fixed production overhead expenditure was sh.24 000 for the year. Actual fixed
production overheads were exactly as budgeted for the year. Normal production levels of 20
000 units for the year were estimated.

Variable selling and distribution costs were 10% of sales revenue. Fixed selling and
distribution overheads were sh.20 000 for the year and fixed administration expenses were
sh.35 000 for the year. Fixed costs were incurred evenly throughout the year.

Actual production and sales for the two periods were:

January-June July-December
Sales (Units) 8,500 9,000
Production (units) 9,000 11,000

There was no opening inventory on 1 January.

Required:
a) Prepare profit statements for the periods January–June and July–December using:

(i) Marginal costing.

(ii) Absorption costing.

b) Reconcile the differences between the absorption profit and marginal profit which you
have calculated in your answer to (a) above.