The Tuba Company commenced business on 1 April 2004 and during its first production period produced 200,000 identical units of a product termed ‘the valve'. The company sold 175,000 units of ‘the valve' during this period. As this was the company's first period of operation there was no opening stock at the start. The 25,000 units unsold are closing stock.
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The costs for this period were as follows:
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Manufacturing costs
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£
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Direct labour
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800,000
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Direct materials
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400,000
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Manufacturing overheads
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150,000
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Non-manufacturing costs amounted to £175,000.
(i) Prepare the profit and loss account for the period.
(ii) Explain what you understand by ‘period costs' and discuss your treatment of them in the calculations you have carried out. Explain fully why you have treated them as you have.
(iii) The company believes that in period 2 it will only sell 50 per cent of the items left in stock at the end of period 1. What implications do you think this has for the Tuba Company.