Absorption Costing

Good Morning MA Tutors,
Kindly shade more light on this;QUESTION ONE
Jimmy manufactures and sells a single product. The following budgeted/ actual information is provided in relation to the production of this product:
USD
Selling price per unit 60
Direct materials per unit 7
Direct labour per unit 6
Variable production overheads per unit 4
Details for the months of May and June 2015 are as follows:
May June
Production of Product A 600 480
Sales of Product A (units) 320 540

Fixed production overheads are budgeted at USD4,000 per month and are absorbed on a unit basis. The normal level of production is budgeted at 400 units per month.
Other costs
Fixed selling USD4, 000 per month
Fixed Administration USD2, 000 per month
Variable sales commission 5% of sales revenue
There was no opening inventory of Product A at the start of May.
Required;
a) Using absorption method solve for the profit statement. (2 Mark)
b) Using variable costing method solve for the profit statement. (1 Mark)
c) Solve the reconciliation of profits. (1 Mark)
d) Evaluate the assumptions underlying Break-even analysis. (1 Mark)
e) Discuss the difference between forecasting and budgeting. (1 Mark)

QUESTION TWO
The Oil Company currently sells three grades of petrol; regular, premium and regular extra which is a mixture of regular and premium. Regular extra is advertised as being “at least 50% premium”. Although any mixture containing 50% or more premium fuel could be sold as regular extra; it is less costly to use exactly 50%. The percentage of premium fuel in the mixture is determined by one small valve in the blending machine. If the valve is properly adjusted, the machine provides a mixture with 50% premium and 50% regular. Assume that if the bulb is out of adjustment the machine provides a mixture that is 60% premium and 40% regular. Once the machine is started it must continue until 100000 liters of ‘regular extra’ have been mixed. The following data is available:
USD
Cost per liter – premium 3.20
Cost per liter – regular 3.00
Cost of checking valve 800.00
Cost of adjusting the valve 400.00

Subjective measures of the probabilities of the valve’s condition are estimated to be:
Event probability
Valve in adjustment 0.7
Value out of adjustment 0.3
Required
a. The expected cost of checking the valve and adjusting it if necessary (2 Marks)
b. The conditional cost of not checking the valve when it is out of adjustment.
(1 Mark)
c. Using the criteria of minimum expected cost, calculate the probability at which there will be need to check if the valve is out of adjustment. Comment on the results.
(2 Marks)
d. Comment on the results obtained in (a) and (b) above. (1 Mark)