Compute the budgeted and actual fixed production costs for the year ended 31 December 2021. Prepare a budgeted income statement for the year ended 31 December 2022 under marginal costing. Suggest two advantages of preparing an income statement under marginal costing compared with absorption costing.

Answer

To solve the question, we need to break it down into parts. **Part 1: Compute the budgeted and actual fixed production costs for the year ended 31 December 2021.** Given data includes: - Total production units in 2021 = 12,000 - Total production units in 2022 = 10,000 - Fixed production costs incurred (given for 2021 but used for calculation in 2022): From the income statement: - Fixed production costs (absorbed) = 800,000 Assuming the fixed production costs are the same for 2022, the budgeted fixed production costs for 2022 = 800,000. **Part 2: Prepare a budgeted income statement for the year ended 31 December 2022 under marginal costing.** Under marginal costing, only variable costs are considered when determining the cost of goods sold. Thus: - Variable production costs = 4,800,000 (as given) - Fixed production costs = 800,000 (budgeted from the previous section) - Total sales = 8,000,000 - Units sold in 2022 are 20% lower: Units sold = 10,000 units - (20% of 10,000) = 8,000 units **Income statement for 2022 under marginal costing:** Sales = 8,000,000 Less: Cost of Goods Sold - Variable costs from produced units = (8,000 units * variable cost per unit) Assuming the variable cost per unit = Total variable production costs / total production units in 2021 = 4,800,000 / 12,000 = 400. This gives us cost of goods sold = 8,000 units * 400 = 3,200,000. Gross Profit = Sales - COGS = 8,000,000 - 3,200,000 = 4,800,000 Less: Non-production costs per unit (fixed) = 800,000 Net Profit = Gross Profit - Non-production costs = 4,800,000 - 800,000 = 4,000,000 **Part 3: Suggest two advantages of preparing an income statement under marginal costing compared with absorption costing:** 1. **Clearer Insight into Variable Costs:** Marginal costing provides a clearer view of variable costs associated with production, allowing management to understand how these costs behave as production levels change. This helps in decision-making related to pricing, budgeting, and financial forecasting. 2. **Avoiding Overapplied Fixed Costs:** Unlike absorption costing, marginal costing prevents the risk of overapplied fixed costs in times of lower production, as it focuses solely on variable costs. This leads to more accurate profit measurement during fluctuations in production volumes.