Preparation of variable and absorption costing profit statements

Oath all Limited, which manufactures a single product, is considering whether to use marginal or absorption costing to report its budgeted profit in its management accounts.

The following information is available:

Units

Direct materials

4

Direct labour

15

19

Selling price

50

Fixed production overheads are budgeted to be £300 000 per month and are absorbed on an activity of 100 000 units per month. For the month in question, sales are expected to be 100 000 units although production units will be 120 000 units. Fixed selling costs of £150 000 per month will need to be included in the budget as will the variable selling costs of £2 per units. There are no opening stocks.

Required:

(a) Prepare the budgeted profit and loss account for a month for Oath all Limited using absorption costing. Clearly show the valuation of any stock figures.

(b) Prepare the budgeted profit and loss account for a month for Oath all Limited using marginal costing. Clearly show the valuation of any stock figures.