Exercise 3. Absorption and marginal costing

Max Ltd. Is drafting a budget on the basis of following data:

Direct material $ 10 per unit

Direct labour $5 per unit

Variable production expenses $ 8 per unit

Fixed production expenses $ 27,000 per month

Normal output 9,000 units per month 90% capacity

Sales price $ 30 per unit

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

	Month 1	Month 2	Month 3
Production	6,500	9,000	10,000
Sales	5,000	8,500	9,500

Required:

1. Prepare two profit statements. Each in comparative columnar form, covering each of three months

   1. On a marginal costing basis

   2. On a full absorption costing basis

2. Reconcile the difference in profits for each month.