Question - Normal 2014 Nov Craddle Ltd manufactures a single product with a selling price of N$28 per unit. Variable production costs per unit are: Direct material N$6.10 Direct Labour N$5.20 Variable overhead N$1.60 Fixed production overheads are N$30 000 per month. Selling and Administration overheads are semi-variable in nature: variable costs are 5% of sales and fixed costs are N$13 000 per month. Production and sales quantities over a two month period are: Production Sales August 2014 4 000 3 500 September 2014 3 600 3 800 There is no finished goods inventory at the beginning of August 2014. The company has prepared the following statement of comprehensive income for each of the two months using the absorption costing method:
August 2014 September 2014
Sales 98 000 106 400
Cost of sales (71 400) (80 270)
Opening inventory - 10 200
Cost of production 81 600 76 440
Closing inventory* (10 200) (6 370)
Gross profit 26 600 26 130
Selling and administration overhead 17 900 18 320
Profit for the period 8 700 7 810
Closing inventory valuation: August 2014 N$81 600/4000 x500
September 2014 N$76 440/ 3600 x 300
REQUIRED:
Prepare a statement of comprehensive income for each of the two months using the marginal costing method.
Reconcile the profit of the absorption costing and marginal costing method for September 2014 only.
Give a detailed explanation why the difference in profits for September 2014 between the two costing methods.