Question
Kindly answer this as soon as possible. urgent Reliance Engineering Company is producing small engines. The company began operations in 2020, produced 2,000 engines and
Kindly answer this as soon as possible. urgent
Reliance Engineering Company is producing small engines. The company began operations in 2020, produced 2,000 engines and sold 1,500 engines. A variable costing income statement for 2020 follows:-
Sales Rs. 3,750,000
Variable cost of goods sold:
Opening inventory Rs. 00
Cost of goods manufactured 2 ,600,000
Cost of goods available for sale 2,600,000
Less closing inventory 650,000 1,950,000
Contribution Margin 1,800,000
Less variable selling & admin. Expenses 270,000
Total Contribution Margin 1,530,000
Less fixed expenses
Fixed factory overheads 1,500,000
Fixed selling & admin. Expenses 190,000 1,690,000
Net loss Rs. 160,000
The Chief Executive of the company is upset about the net loss because he wanted to borrow funds to expand capacity of the business.
Required:
- Prepare absorption costing income statement for 2020
- Explain the reasons of difference between the net income/loss shown under the two costing systems.
- Would it be appropriate to present an absorption costing income statement to the banker, knowing that the company sustained loss under variable costing system.
- Assume that during next year of operations, the company produced 2,000 units of engine and sold 2,200 units of engine and experienced the same total fixed costs as during 2020. For the second year:
- Prepare a variable costing income statement
- Prepare an absorption costing income statement
- Explain the difference between the incomes for the second year under the two costing systems.
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