Pinafore Ltd manufactures and sells a single product. The budgeted profit statement for this month, which has been prepared using marginal costing principles, is as follows: 

The normal monthly level of production is 25,000 units and stocks are valued at standard cost. 

Required

1. Prepare in full a budgeted profit statement for this month using absorption-costing principles. Assume that fixed production overhead costs are absorbed using the normal level of activity. 

2. Prepare a statement that reconciles the net profit calculated in (1) with the net profit using marginal costing. 

3. Which of the two costing principles (absorption or marginal) is more relevant for short-run decision making, and why?

Transcribed Image Text:

£000 £000 Sales (24 000 units) Less Variable production cost of sales: Opening stock (3000 units) Production (22 000 units) Closing stock (1000 units) 864 69 506 (23) (552) 312 Less Variable selling cost Contribution Less Fixed overhead costs: (60) 252 Production 125 Selling and administration 40 (165 Net profit 87