Reference no: EM133138665

Question - The management of a company have been using a policy of marginal costing whereby the variable costs of producing counter stools are charged to cost units, and fixed costs of the period are written off in full against the aggregate contribution. After assessing the drawbacks of marginal costing, it was advised to consider costing items under the absorption costing approach. The following data was provided for the years December 31, 2019 and December 31, 2020.

On January 1, 2019, the company had 5,000 counter stools valued at a cost of $175,000. For both periods the company also had budgeted fixed overhead to be $315,000 and budgeted production of 90,000 counter stools; and overheads are currently absorbed on a per unit basis.

Required -

a) Make an income statement using marginal costing as well as absorption costing for the year ended December 31, 2019.

b) Make an income statement using marginal as well as absorption costing for the year ended December 31, 2020.

c) Make an reconciliation between both profits for both years.