e. List 2 advantages and disadvantages of absorption and variable costing

QUESTION 2 Majestic Canine Bhd. is a small business that has been operating for just two years, producing and selling dry cat food for senior cats. The cat food is sold at RM19 per kilogram. The company uses an absorption costing system for internal reporting purposes. As a startup company, Majestic Canine is struggling to stay in business due to lack of cash flow. The owner, Encik Hakim, suspected that the bookkeeper is on to something. He told one of his managers, "Well, it takes money to make money. That's understandable. We spent a lot of money on brand advertising. Our sales have increased, so why might our operating income have declined? Accounting is not rocket science. We have got off to a good start, but look at us now! The bookkeeper definitely has something up his sleeves." Information for the company's first two years of operation is as follows: Year 1 Year 2 Sales (in kilograms) 6,500 9,000 Production (in kilograms) 10,000 10,000 Production costs: Variable manufacturing costs RM80,000 RM80,000 Fixed manufacturing overhead RM40,000 RM40,000 Selling and administrative expenses: Variable (per kilogram) RM2 RM2 Fixed RM20,000 RM40,000 Required: a. Prepare a statement of profit or loss for Majestic Canine Bhd, for its first two years of operations using the absorption costing system. Based on your answers, comment on the owner's saying, "We have got off to a good start, but look at us now!". (8 marks) b. Refer to your answers in Requirement (a). "I worked all night to prepare the statements! How could Encik Hakim say that. This is so upsetting!" says the bookkeeper. Assuming you are the bookkeeper, explain to Encik Hakim on the declining operating income in Year 2. (2 marks) c. Assuming the company uses variable costing for its internal reporting purposes. Would Encik Hakim's perspective about his company's performance be changed, and why? Prepare a statement of profit or loss for Majestic Canine Bhd, for its first two years of operations using the variable costing system to support your answer. (8 marks) d. Reconcile Majestic Canine's operating income reported under the two costing methods for each of its first two years of operations. (3 marks) QUESTION 2 Majestic Canine Bhd. is a small business that has been operating for just two years, producing and selling dry cat food for senior cats. The cat food is sold at RM19 per kilogram. The company uses an absorption costing system for internal reporting purposes. As a startup company, Majestic Canine is struggling to stay in business due to lack of cash flow. The owner, Encik Hakim, suspected that the bookkeeper is on to something. He told one of his managers, "Well, it takes money to make money. That's understandable. We spent a lot of money on brand advertising. Our sales have increased, so why might our operating income have declined? Accounting is not rocket science. We have got off to a good start, but look at us now! The bookkeeper definitely has something up his sleeves." Information for the company's first two years of operation is as follows: Year 1 Year 2 Sales (in kilograms) 6,500 9,000 Production (in kilograms) 10,000 10,000 Production costs: Variable manufacturing costs RM80,000 RM80,000 Fixed manufacturing overhead RM40,000 RM40,000 Selling and administrative expenses: Variable (per kilogram) RM2 RM2 Fixed RM20,000 RM40,000 Required: a. Prepare a statement of profit or loss for Majestic Canine Bhd, for its first two years of operations using the absorption costing system. Based on your answers, comment on the owner's saying, "We have got off to a good start, but look at us now!". (8 marks) b. Refer to your answers in Requirement (a). "I worked all night to prepare the statements! How could Encik Hakim say that. This is so upsetting!" says the bookkeeper. Assuming you are the bookkeeper, explain to Encik Hakim on the declining operating income in Year 2. (2 marks) c. Assuming the company uses variable costing for its internal reporting purposes. Would Encik Hakim's perspective about his company's performance be changed, and why? Prepare a statement of profit or loss for Majestic Canine Bhd, for its first two years of operations using the variable costing system to support your answer. (8 marks) d. Reconcile Majestic Canine's operating income reported under the two costing methods for each of its first two years of operations