THUMB Ltd, which manufactures a single product, is considering whether to use 

absorption costing or marginal costing to report its budgeted profit in its management

accounts.

The following information is available:

K /unit

Direct materials 4.00

Direct labour 15.00

19.00

Selling price 50.00

Fixed production overheads are budgeted to be K300,000 per month and are absorbed

on an average activity level of 100,000 units per month.

For the month of April 2020, sales are expected to be 100,000 units although production

units will be 120,000 units. Fixed selling costs of K150,000 per month will need to be

included in the budget as will the variable selling costs of K2.00 per unit.

There are no opening inventories expected at 1 April 2020.

Required:

(a) Prepare the budgeted statement of profit or loss for the month of April 2020 for

THUMB Ltd using absorption costing. Clearly show the valuation of any inventory

figures. [6 Marks]

(b) Prepare the budgeted statement of profit or loss for the month of April 2020 for

THUMB Ltd using marginal costing. Clearly show the valuation of any inventory

figures. [4 Marks]