Leisure Furniture (LF) Ltd makes wooden garden tables and chairs that are sold in sets (one table and four chairs) and its sales are very seasonal. LFs production manager is trying to prepare budgets for next year. For this purpose, she divides the year into two six-monthly periods, to allow for holidays and seasonal sales. The production cost of a set (the companys only product) is as follows, based on a budgeted production level of 50,000 sets per annum.

($)

Variable materials 40.00

Variable labour (5 hours) 60.00

Variable overheads 8.00

Fixed overheads 300,000

In addition to the production costs, sales commission of 10% of selling price is paid on each set sold. The selling price is $250. Fixed selling and distribution costs amount to $4,000,000 per annum. Sales and production figures are budgeted as follows.

October to March

Sets sold 0

Sets produced 30000

April to September

Sets sold 50,000

Sets produced 20,000

There will be no opening inventory in October. Fixed costs are incurred evenly throughout the year.

Calculate (a) Prepare income statements, clearly showing inventory values for each six monthly period using (10 marks) (i) variable costing (ii) absorption costing.

(b) Prepare a statement which reconciles the income for each six-monthly period calculated in (a). (3 marks)

(c) Discuss the advantages and disadvantages of variable and absorption costing and recommend which of these should be used given LFs circumstances. (3 marks)