Reference no: EM133216407

a. Highlight the usefulness of marginal and absorption costing clearly indicating the circumstances in which each of the costing methods can be used in a manufacturing business. Give relevant examples and use calculations where possible.

b. The following information is available for a Randburg based company for the month of July 2018.

Direct material per unit R15

Direct labour per unit R20

Variable production overhead per unit R5

Additional information

i) Each unit requires 3 labour hours to make and 4 machine hours to make.

ii) The raw material used is unique and imported, the direct material usage per unit is R3kg

iii) Fixed overheads are absorbed using machine hours at normal capacity of 20 000 machine hours at R2.50 per machine hour

iv) Budgeted units of production were 5 000 at normal capacity

v) Actual units produced were 5 500 for the month of July 2018

vi) The company uses a mark-up on marginal cost or absorption cost of 150% to arrive at selling price, depending on the costing method chosen.

Required:

Draw up the Income statements using the marginal and absorption approaches; include a reconciliation of the profits for the month of July 2018.