The Cost Officer of a company that manufactures a product came up with the following information: Direct materials: 30% of Sales Direct wages (Variable): 20% of Sales Production overhead (Fixed): Same as direct wages Production overhead (Variable): 25% of direct wages Administration overhead (Fixed): 10 % of Sales Selling overheads (Note 1): Same as Production overhead (Variable) Note 1: The behavior of selling overhead in relation to changes in sales volume (units) is as follows: Normal activity: M65 000 90% of normal activity: M63 050 110% of normal activity: M66 950. The company uses an absorption costing system to value inventory. The predetermined absorption rates are based on a normal level of activity. During November and December 2021 of the financial year, the production and sales expressed as percentages of normal activity, were as follows: November December Sales 80% 100% Production 100% 80% The actual selling price and variable costs per unit were as budgeted. It is the company’s decision to maintain profit at 10% of sales, which is M130 000; and selling price at M130 per unit. The fixed costs incurred in November and December 2021 were as budgeted, except for production overheads, which exceeded the budget by 10%.

Required:

(a). Calculate the unit product costs under absorption costing system:

(b). Calculate the over-/under –absorbed fixed production overhead for each month.

(c). Prepare profit and loss statements for each month in a tabular form on the basis of:

(i). Absorption costing system

(ii) Marginal costing system

(d). Reconcile the profit or loss of the two costing systems as calculated in part “c”.

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