You are the management accountant for NJoy Toys Plc., a company that manufactures and sells a range of toys to the retail market.

You are the management accountant for NJoy Toys Plc., a company that manufactures and sells a range of toys to the retail market.

The company has enjoyed number of years of buoyant sales but is currently experiencing increased competition in its main market coupled with a slight downturn in the economy, which is forecast to last another six months.

The company has always used an absorption costing approach to its pricing using a unit basis to apportion its fixed production overheads.

In a recent accounting team meeting it was suggested that a marginal costing approach might be more beneficial in the current climate.
Therefore as management accountant you have been approached to prepare two profit statements for the next two quarters showing the profit using both a marginal and absorption costing as a basis:

The following information has been supplied:

Selling price per toy £13.50

Production costs per toy

Raw materials £2.40
Labour £3.00
Variable production overhead £1.50
Variable selling overhead £0.60
Fixed Overheads per quarter

Production £240,000
Sales and administration £450,000

Normal capacity is 960,000 toys

The sales and production pattern for the next two quarters is:

Quarter 1 Quarter 2
Toys Toys

Production 1,500,000 1,800,000
Sales 1,200,000 1,350,000

There were no opening stocks for quarter one

1. Prepare the profit statements for Quarter 1 and 2 using both a marginal and absorption costing approach. Show clearly all your calculations including the stock levels, unit costs and absorption rate.

2. Produce a Reconciliation statement for each quarter to show the difference between the marginal and absorption costing profit.

Based on the information given to you about the company above and your earlier calculations produce a briefing document which sets out the main similarities and differences between marginal and absorption costing and the situations where they might prove useful. Provide a recommendation as to how the company should price the product during the next two quarters.

 

 

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