Shown below is an extract from next year’s budget for a company manufacturing two products in two…

Shown below is an extract from next year's budget for a company manufacturing two products in two production departments.

Hourly wage rates for direct operatives are budgeted at £4 per hour in Production Department 1 and £3 per hour in Production Department 2. It should be assumed that all prime costs are variable.

The company operates a full absorption costing system and each production department charges its budgeted overhead to products by means of a departmental direct labour hour absorption rate. Production and overheads are budgeted to occur evenly throughout the year. However, monthly sales do vary and the budgeted sales for the first month are, Product A 1,200 units and Product B 2,300 units. The total cost per unit of the opening stocks is Product A £98 per unit and Product B £75 per unit. These stock values are based upon the costs in the current period and are not the budgeted unit costs for the next year.

Required:

(a) Calculate the budgeted profit for the first month of next year for the above company. Any necessary assumptions should be clearly indicated.

(b) Calculate the effect on the above budgeted profit if in the first month, the actual results are as predicted except that actual production of Product B is 50 units higher than the budget.

(c) The accountant of the above company is considering changing from a fu: absorption costing system to a marginal costing system in which eacr month's fixed overheads will be written off immediately they are incurred. Describe the effect of the above proposal on the first month's budgeted profit and explain the reason for that effect. (Calculations are not required and candidates should assume that the opening stock values would be reduced to marginal cost before the first month's budgeted profit is calculated.)