The Shatontola Co. Ltd is a single-product manufacturing company, which uses a marginal costing system for internal management purposes.  The year-end external reports are converted to absorption costs.  Variances are charged to the cost of goods sold. The following data refers to the years ended 31 December 2020 and 2021:                                                                                                                      2020                        2021                                                                                                                        K                                 K Sales price per unit                                                                                       80                               90 Standard marginal cost per unit:     Direct materials                                                                                         21                               23     Direct Labour                                                                                             19                               22     Marginal factory overheads                                                                       8                               10     Marginal selling and administrative expenses                                        2                                 3 Fixed factory overheads                                                                           170,000                  180,000                                                                                                                          Units                       Units Opening inventory                                                                                       1,500                      2,000 Closing inventory                                                                                          2,000                      1,500 Sales                                                                                                              20,000                    25,000 The normal volume used for the purpose of absorption costing is 28,000s units in both years. REQUIRED: Prepare profit and loss accounts for the year-ended 31 December 2021 on a marginal costing and on an absorption costing basis. Discuss any differences which you may find between these two profit and loss acconts. State what advantages and disadvantages attach to the marginal costing approach for internal management purposes.

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The Shatontola Co. Ltd is a single-product manufacturing company, which uses a marginal costing system for internal management purposes.  The year-end external reports are converted to absorption costs.  Variances are charged to the cost of goods sold.

The following data refers to the years ended 31 December 2020 and 2021:

                                                                                                                     2020                        2021

                                                                                                                       K                                 K Sales price per unit                                                                                       80                               90

Standard marginal cost per unit:

    Direct materials                                                                                         21                               23

    Direct Labour                                                                                             19                               22

    Marginal factory overheads                                                                       8                               10

    Marginal selling and administrative expenses                                        2                                 3

Fixed factory overheads                                                                           170,000                  180,000

                                                                                                                         Units                       Units

Opening inventory                                                                                       1,500                      2,000

Closing inventory                                                                                          2,000                      1,500

Sales                                                                                                              20,000                    25,000

The normal volume used for the purpose of absorption costing is 28,000s units in both years.

REQUIRED:

  • Prepare profit and loss accounts for the year-ended 31 December 2021 on a marginal costing and on an absorption costing basis.
  • Discuss any differences which you may find between these two profit and loss acconts.
  • State what advantages and disadvantages attach to the marginal costing approach for internal management purposes. 
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