A company manufactures a single product with the following variable costs per unit:
Direct materials ...............................£7.00
Direct labour ....................................£5.50
Manufacturing overhead ...............£2.00
The selling price of the product is £36.00 per unit. Fixed manufacturing costs are expected to be £1 340 000 for a period. Fixed non-manufacturing costs are expected to be £875 000. Fixed manufacturing costs can be analyzed as follows:

'General Factory' costs represent space costs, for example rates, lighting and heating. Space utilization is as follows:
Production department1 ................................. 40%
Production department2............ ..................... 50%
Service department.......................................... 10%
Sixty per cent of service department costs are labour related and the remaining 40 per cent machine related.
Normal production department activity is:

Fixed manufacturing overheads are absorbed at a predetermined rate per unit of production for each production department, based upon normal activity.

Required:
(a) Prepare a profit statement for a period using the full absorption costing system described above and showing each element of cost separately. Costs for the period were as per expectation, except for additional expenditure of £20 000 on fixed manufacturing overhead in Production Department 1. Production and sales were 116 000 and 114 000 units respectively for the period. 

(b) Prepare a profit statement for the period using marginal. costing principles instead. (5 marks)

Transcribed Image Text:

Production 1 Department 2 Service Department £265 000 General Factory £380000 E465000 £230000 Machine hours Production units Direct abour hours Department 1 Department 2 80000 100 000 2400 2400 120000 120000