Gladstown Manufacturing has added two new products to its range. Its accountant
has produced the following summarised financial statement showing the profit
earned on these products for the first year using absorption costing.
Beta Delta
Materials 25,000 7,500
Direct labour 60,000 30,000
Production overheads 120,000 60,000
Cost of sales 205,000 97,500
Sales 250,000 105,500
Gross profit 45,000       8,000
Other overheads 20,500 9,700
Net profit/(loss) 24,500 (1,700)
Units Units
Sales 25,000 7,500
Closing stock of finished goods 2,000 1,250
There is concern that Delta is showing a loss and it has been suggested that the use
of marginal (variable) would give a fairer picture of the financial results.
Further analysis shows that one-third of the production overhead charged to each
product varies according to the level of production whereas two-thirds of the charge
is product-related and is fixed. 75% of the other overheads are company overheads
that have been allocated to the products and 25% vary with the level of sales of each
product.

Required:
(a) Redraft the absorption costing statement in more detail showing such matters
as the cost of goods produced, stocks, fixed overheads and variable overheads

(b) Prepare a statement showing the contribution and net profit of each product
using marginal (variable) costing.

(c) Explain why the net profit figures are different under the two methods.

(d) Do you consider that the marginal costing figures give a fairer picture of the
results of Delta? What use might the management of Gladstown Manufacturing
make of these figures?
All calculations are to be to the nearest $.

Answer rating: 100% (QA)

Ans A Working Notes 1 a where every per unit cost is calculated as Cost Amount produced b It should also be taken into consideration that Production O... View the full answer