Lahore Packages Ltd. produces food containers which are used by hotel industry for food parcels to customers. The containers are sold at Rs. 20 per unit. The company produced and sold following quantity of food containers during last two years of operations:

ParticularsYear1Year 2

Units produced100,000120,000

Units sold90,000125,000

The production cost of food containers during these two years remained constant which was as under:

Direct materialRs. 5 per unit

Direct labourRs. 2 per unit

Variable overheadsRs. 3 per unit

Fixed overheadsRs. 150,000 annually

Variable selling expensesRe. 1 per unit

Fixed administrative expensesRs. 180,000 annually

Required:

a)Prepare income statements for each of the two years under absorption costing and under variable costing methods.

b)Prepare reconciliation statements for each year where reported results are different in absorption costing and variable costing.

Evaluate performance of the company indicating which of the year yield greater profitability and its reasons under any of the costing methods.