Question 1: Prepare the Income Statement for the year ended 31 December 2021 using the absorption costing method Question 2: Prepare the Income Statement for the year ended 31 December 2021 using the variable costing method. Question 3: Reconcile the profit calculated according to absorption costing (in question 1) with the profit calculated according to variable costing (in question 2).
VARIABLE COSTING AND ABSORPTION COSTING
Umdloti Ltd, which manufactures liquid hand soap, commenced operations on 01 November 2021. Standard production for a typical month is expected to be 160 000 bottles. During November 2021 the company manufactured 170 000 bottles of hand soap. On 30 November 2021 there were 46 000 bottles of hand soap in inventory. Manufacturing and commercial costs during November 2021 were as follows:
Direct materials R212 500
Direct labour R680 000
Variable manufacturing
Variable marketing costs R135 160
Fixed administration costs R84 320
Fixed manufacturing overheads R113 900
The hand soap was sold at R12 per bottle during November 2021. During December 2021, Umdloti Ltd decided to increase the selling price by 10% because the fixed
All other factors remain unchanged.
Question 1:
Prepare the Income Statement for the year ended 31 December 2021 using the absorption costing method
Question 2:
Prepare the Income Statement for the year ended 31 December 2021 using the variable costing method.
Question 3:
Reconcile the profit calculated according to absorption costing (in question 1) with the profit calculated according to variable costing (in question 2).
Question 4:
Explain how absorption costing can enable a manager to increase production solely for the purpose of inflating profit but prevents a manager from doing this if variable costing is used.
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