Management adopted the policy, effective from I January 2011, ol producing only

Question

Management adopted the policy, effective from I January 2011, ol producing only as much product as was needed to fill sales orders. During 2011. sales were the same as for 2010 and were filled entirely from stock at the suit of 2011. prepare income statements with one column for 2010, one column for 2011 and one column for the two years together, using (a) variable costing and (b) absorption costing. What is the breakeven point under (a) variable costing and (b) absorption costing? What stock costs would be carried on the balance sheets at 31 December 2010 and 2011, under each method? Assume that the performance of the top manager of the company is evaluated and warded largely on the basis of reported operating profit. Which cosling method would he manager prefer? Why?

Explanation / Answer

Ans 1 Absorption Costing 2010 2011 Sales (10000*30 Euro) 300000 300000 Less: Manufacturing cost Beginning Inventory 140000 Total units produced 20000 280000 0 Less: Ending inventory 280000/20000*10000 -140000 140000 0 Gross Margin 160000 160000 Less: Marketing & Administrative Cost 40000 40000 Net Operating Income 120000 120000 Variable Costing 2010 2011 Sales (10000*30 Euro) 300000 300000 Contribution 300000 300000 Less: Fixed Cost Manufacturing cost 280000 280000 Marketing & Administrative Cost 40000 40000 Net Operating Income -20000 -20000 ANS 2 Fixed Expenses/Contribution Margin ratio (280000+40000)/1 320000 Contribution Margin ratio=Contribution/Sales In both cases same Per unit 320000/30 10667 Ans 3 Absorption costing in 2010 Ending inventory 280000/20000*10000 140000 Production in 2011 is Nil So the ending inventory is sold so Ending Inventory 0 Invariable costing there is no ending Inventory as there is no variable cost of goods produced All fixed cost is considered period cost 2010 0 2011 0 Ans 4 Absorption costing is better as it produces profit and the manufacturing cost are considered product cost instead of period cost

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