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Omega makes and sells a single product. The company operates a standard marginal costing system and a just-in-time purchasing and production system. No inventory of raw materials or finished goods is held.

Budget Data

Standard production costs per unit K__

Direct material

Direct labour

Variable Overheads

Standard selling price:

Budgeted fixed production overheads: K170,000 Budgeted production and sales: 10,000 units

detail as possible.

(6 marks)

8 Kg at K10.80 per Kg 86.40 1.25 hours at K18 per hour 22.50 1.25 hours at K6.00 per direct labour hour 7.50 K180 per unit

Actual Data

Direct material: 74, 000kg at K11.20 per kg

Direct labour: 10, 8000 hours at K19.00 per hour Variable overheads: K70, 000

Actual selling price: K184 per unit

Actual fixed production overheads: K168, 000 Actual production and sales: 9, 000 units

Required:

A statement using marginal costing principles that reconciles the budgeted profit and the actual profit. Your statement should show the variances in as much

2

b) (i) Explain why the variances used to reconcile profit in a standard marginal costing system are different from those used in a standard absorption costing system. (1 mark)

(ii) Calculate the variances that would be different and any additional variances that would be required if the reconciliation statement was prepared using standard absorption costing.

Note: Preparation of a revised statement is not required. (2 marks)

c) Explain the arguments for the use of traditional absorption costing rather than marginal costing for profit reporting and inventory valuation.

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