ABSORPTION AND DIRECT COSTING

ZEE Company produces and sells a single type of recreational equipment. One of the companys camp store sells each equipment at Rs. 900. The company produced 40,000 units and sold 35,000 units in the month of June 2020. There are no opening and closing finished goods inventories. Cost of direct material, direct labor and variable manufacturing expenses for producing each unit are Rs. 200, Rs. 150 and Rs. 300 respectively. Following expenses are also associated for the month of June:

Required:

1. Prepare operating income statement under both, Absorption and Variable Costing Approach. (5-Marks)

2. Explain the reason of any difference in operating net profit under both approaches. (2 Mark)