Audumla in 2001. G0 minutes) Audumla, AS, began operations in 2000 and differs from Ginnungagap (described in Problem 7-18) in only one respect: it has both variable and fixed manufacturing costs. Its variable manufacturing costs are EUR 7 per tonne, and its fixed manufacturing costs are EUR 140,000 per year. The denominator level is 20,000 tonnes per year.

REQUIRED 1. Using the same data as in Problem 7-18 except for the change in manufacturing cost behaviour, prepare income statements with adjacent columns for 2000, 2001 and the two years together, under

(a) variable costing and

(b) absorption costing.

2. Why did Audumla have operating profit for the two-year period when Ginnungagap in Problem 7-18 suffered an operating loss?

3. What value for stock would be shown in the balance sheet as at 31/12/2000 and 31/12/2001 under each method?

4. Assume that the performance of the top manager of the company is evaluated and rewarded largely on the basis of reported operating profit. Which costing method would the manager prefer? Why? nju8