Question
Super Product Ltd prepares monthly income statements. Data relating to the months of March and April 2012 are given below:
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March 2012
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April 2012
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Beginning Inventory
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Nil
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150 Units
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Production
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500 Units
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400 Units
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Sales
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350 Units
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520 Units
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Variable Cost Data:
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Manufacturing cost per unit produced
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$100
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$100
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Operating Cost (Non-manufacturing Costs) per unit sold
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$30
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$30
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Fixed Cost Data:
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Manufacturing Costs
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$20 000
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Operating Costs (Non-manufacturing Costs)
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$6 000
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Selling Price per unit
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$240
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Stocks are valued on First In First Out (FIFO) basis.
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Required:
a. Compute operating profit for March and April 2012 using absorption costing.
b. Compute operating profit for March and April 2012 using variable costing.
c. Reconcile and explain why the income was different each month using the two methods. Show computations.
d. Assume that the performance of the top manager is evaluated and rewarded largely on the basis of reported profit. Which costing method would the manager prefer? Why?