Encik Ahmad, president of ABC Company is surprised at the performance of his company. "We sold the same number of units this year as we did last year, yet our profits have more than doubled. There must be something wrong with our accounting system or the people managing it?" The statements to which En. Nordin was referring are shown below (absorption costing basis): Sales (40,000 units each year) Cost of goods sold Gross margin Selling and administrative expenses Net operating income Year 1 Year 2 RM 1,000,000 RM 1,000,000 620,000 560,000 380,000 440,000 300,000 300,000 RM 80,000 RM 140,000 The statements above show the results of the first two years of operation. In the first year, the company produced and sold 40,000 units; in the second year, the company again sold 40,000 units, but it increased production as shown below: Production in units Sales in units Year 1 Year 2 40,000 50,000 40,000 40,000 RM 8 RM 8 Variable manufacturing cost per unit produced Variable selling and administrative expense per unit sold RM 1 RM 1 Fixed manufacturing overhead costs (total) RM 300,000 RM 300,000 ABC Company applies fixed manufacturing overhead costs to its only product based on each year's production. Thus, a new fixed manufacturing overhead rate is computed each year. 5 Required: 1. Compute the unit product cost for each year under: a. Absorption costing. b. Variable costing. (4 marks) (9 marks) 2. Prepare a contribution format variable costing income statement for each year. 3. Reconcile the variable costing and absorption costing net operating income figures for each year. (4 marks) 4. Explain to the president why, under absorption costing, the net operating income for Year 2 was higher than the net operating income for Year 1, although the same number of units was sold in each year. (4 marks) 5. Why is variable costing used only for internal reporting and not for external financial reporting purpose? (4 marks)