Colourful Rainbow produces and sells mugs. The company currently uses variable costing in its

accounting system, with the following selected results for its financial performance in 2019:

Contribution margin RM300,000

Variable selling and administrative RM180,000

Fixed selling and administrative RM60,000

Net income RM150,000

During the period, the company produced 100,000 mugs and sold 80,000 mugs. Selling price is

RM12 per unit. There was no beginning or ending work-in-process (WIP) inventory, and no

beginning finished-goods inventory.

The company is considering an absorption costing system.

Required:

1. Prepare the absorption costing income statement for the company for the year 2019.

2. Refer to your answer in Requirement 1. Is the operating income reported under absorption

costing system different from the amount reported under variable costing? Why or why not?

Show your calculation to support your answer.

3. In your opinion, which measure of profit, absorption costing profit or variable costing profit,

is a better measure of performance during 2019? Explain.

4. Assuming in the year 2020, the production units remain the same and the company has no

ending finished-goods inventory. Compute operating income for the year under the variable

costing and absorption costing.

5. Why are companies with small levels of inventory generally unconcerned with the choice of

variable or absorption costing? Discuss.