Question 1

Maya Limited manufactures a specialised storage accessory for automobiles called the Storax, which is a type of pocket which can be easily fixed in the boot of any vehicle. The company has been in operation for two years and, now that the production process has been established and refined, the directors have decided to focus on the income and costs arising from activities. The managing director has recently read an article about product costing and, in particular, absorption and variable costing and is keen to understand how this would affect company profits.

The following information is available for the months of July and August:

July August

Production (units) 13 000 15 000 Sales (units) 12 000 16 000 Direct materials $29 250 $33 750 Direct labour $19 500 $22 500 Variable production overheads $7 800 $9 000 Total selling and administrative expenses $45 200 $57 600

Additional information:

1.For Ludo Limited normal production capacity is 15 000 units per month.

2.Fixed production overheads are $29 400 per month.

3. The company sells the Storax for $20 each.

4. Total selling and administrative expenses includes a fixed and variable element. The variable portion is $ 1.55 per unit and is based on units sold.

5. At 30 June the company had no Storax accessories in its warehouse.

REQUIREMENT:

REQUIRED:
1.1	Prepare profit statements for Mayana Limited for the months of July and August using Absorption costing.
1.2	Reconcile the profit between Absorption costing and Variable costing.
1.3	Provide a brief explanation of the effect on profit of using each of the methods at (b) above