Resol Ltd commenced trading on 1 April 2011 making the product Resol. The standard cost sheet for Resol is as follows:

Sales price                                  35.00

The fixed production overhead figure has been calculated on the basis of a budgeted normal output of 24,000 units per annum. Fixed Sales and Administration costs are estimated at GH¢24,000 per annum. You may assume that all budgeted fixed expenses are incurred evenly over the year.

The sales price is GH¢35.00 and the actual number of units produced and sold was as follows:
.                                                    April                 May
Production – units                     2,000                2,500
Sales – units                               1,500                3,000

Required:
Prepare a profit statement for each of the months April and May using:        (12 marks)

• Marginal costing.

• Absorption costing.

Bonti Ltd produces three different products using two production departments. The company currently uses Absorption Costing to establish product costs and profitability. The Directors have recently attended a conference on Activity Based Costing (ABC) and are examining whether ABC might provide a better system for Bonti Ltd.

The following budgeted information for period ended 31 December 2017 has been collated for each of the three products:

Raw material costs GH¢4 per kilo and the hourly rate for all labour is GH¢5. The direct expenses relate entirely to specialized packaging which is uniquely designed for each of the products and is therefore directly attributable to that product alone.

The current costing system absorbs overheads to the Machine and Assembly Departments on the basis of a recovery rate of GH¢3.50 per machine hour and GH¢1 per labour hour respectively.

The following is an analysis of the overheads by department:
Department                                                               Overheads
Purchasing Department                                               22,400
Production set-up & Design Department                 34,500
Customer Service Department                                  32,600
Machine                                                                        123,000
Assembly Department                                                26,500

The Departmental Managers have provided the following additional information about operations in their departments:

The Machine Department is capital intensive and the Assembly Department is labour intensive.
Required:
a) Calculate the prime cost for each product.                                                                                                                      (3 marks)

b) Calculate the profit per unit for each product if overheads are absorbed on the Current Costing basis.                      (5 marks)

Bosco Ltd makes and sells one product. Currently, it uses absorption costing to measure profits and inventory values. The budgeted production cost per unit is as follows:

Normal output volume is 16,000 units per year and this volume is used to establish the fixed overhead absorption rate for each year. Costs relating to sales, distribution and administration are:
Variable              20% of sales value
Fixed                   GH¢180,000 per year.

There were no units of finished goods inventory at 1st October 2015. The fixed overhead expenditure is spread evenly throughout the year. The selling price per unit is GH¢140. For the two six-monthly periods detailed below, the number of units to be produced and sold are budgeted as follows:

The entity is considering whether to abandon absorption costing and use marginal costing instead for profit reporting and inventory valuation.

Required:
ii) Prepare profit statements for management using:                                                                       (9 marks)

• marginal costing

• absorption costing

iii) Prepare an explanatory statement reconciling the profits under marginal costing with that of absorption costing.     (3 marks)