Active Producers Inc. suffered a loss for the first month of operations. Following is the statement of profit and loss prepared by the accounting service providers of Active Producers.

Rs Rs

Sales 400,000 Less variable cost of goods sold 160,000 Gross contribution margin 240,000 Less variable selling and administrative expenses 60,000

Contribution margin 180,000 Less fixed expenses:

Fixed manufacturing overhead 150,000 Fixed selling and administrative expenses 40,000 190,000

Net operating loss (10,000)

The loss created a serious problem because company was planning to use the statement to encourage investors to purchase the inventory of the company. Other relevant data is given below:

Units produced during the first month of operation 50,000 Units sold during the first month of operation 40,000

Variable unit cost: Rs Direct materials 2.00 Direct labour 1.60 Variable manufacturing overhead expenses 0.40 Variable selling and administrative expenses 1.50

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REQUIRED

(a) What costing method was used by the accounting service providers to prepare income statement of Active Producers Inc? Can an absorption costing income statement show a profit rather than loss? Support your answer with computations.

[10 Marks]

(b) If 60,000 units were sold in the second month and there were no closing inventories, prepare the company's statement of profit and loss using:

(i) absorption costing [20 Marks]

(ii) marginal costing

[15 Marks]

(c) Reconcile the second months net operating income under both the costing approaches.