Cost Accounting

1. The information below relates to the operations of Catfish Manufacturing for the years 2021 and 2022.

$

Per Unit:

Sales price 25.00

Direct material cost 5.50

Direct wages 4.80

Variable production overhead 1.70

Variable administrative costs 3.00

Per annum:

Fixed production overhead $400 000

Fixed selling and administrative expenses $104 000

Normal activity level: 250 000 units per annum

Variable selling cost: 2% of sales

On January 1, 2021, the company had 5,000 units in stock. During the year, Catfish produced 220,000 units and sold 210,000. In 2022, the company produced 6% more units, but units sold declined by 5%.

Required:

a) Prepare:

i. income statements for 2021 and 2022 using the marginal costing method [15 marks]

ii. income statements for 2021 and 2022 using the absorption costing method [15 marks]

iii. Prepare the reconciliation statement for each year [7 marks]

2. The manager of Catfish Limited is not clear as to why the firm should use two different bases for the preparation of financial statements. He is also concerned that the net income and stock valuations differ with the two methods. Write a well-formatted memo to the manager. This memo should:

i. Explain any differences in stock valuation and net profit for 2021

ii. Give THREE arguments to support the uses of marginal costing

iii. Give THREE arguments to support the uses of absorption costing

iv. Explain why a firm might use both methods. [16 marks]