Mahler Products has two manufacturing departments each producing a single standardized product. The data for unit cost and selling price of these products are as follows:
The factory cost figures are used in the departmental accounts for the valuation of finished goods stock. The departmental profit and loss accounts have been prepared for the year to 30 June 1985. These are given below separately for the two halves of the year.
Mahler Products Departmental profit and loss accounts Year to 30 June 1985
The total sales revenue was the same in each six monthly period but in the second half of the year the company increased the sales of Department A (which has the higher profit mark-up) and reduced the sales of Department B (which has the lower profit mark-up). An increase in company profits for the second six months was anticipated but the profit achieved was £8.000 lower for the second half of the year than for the first half. The profit for Department A fell by £41,000 while the profit for Department B rose by £33,000. There has been no change in prices of inputs or outputs.
You are required:
(a) to explain the situation described in the last paragraph – illustrate your answer with appropriate supporting calculations, and
(b) to redraft the departmental profit and loss accounts using marginal cost to value unsold stock.