Question 2

Assafa Bottle Company was formed of few years ago when a few friends who were alumni of the International Islamic University Malaysia decided to establish it using their own sourced funds. It manufactures plastic bottles used in the mineral-water industry. A case of bottle sells for RM 25. The variable costs of production for one case of bottles are as follows: Budgeted fixed manufacturing overhead is RM400,000 per year, and fixed selling and administrative cost is RM 37, 500 per year. Variable selling and administrative costs amounted to RM0.50 per case. The following data pertain to the company's first three years of operation (a unit refers to one case of bottles): Actual costs were the same as the budgeted costs. Required: a. Alia, the company's accountant, a graduate of the accounting department of the university believes that it is important to prepare the variable costing income statement as she thinks that the other managers would prefer variable costing over absorption costing. Briefly explain three reasons why she thinks so. b. Prepare operating income statements for Assafa Bottle Company for its first three years of operations using: i. Absorption costing ii. Variable costing c. Reconcile Assafa Bottle Company's operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method d. One of the alumnus, a graduate from the Kulliyyah of Engineering and who is also the manager of the production prefer the overproduction of seeing the operating income statements