Question 2

Napoe Ltd. is a well-established family business, which makes spare parts for kids scooters that are sold nationally. However, at present its flagship product, the triple chrome-plated steel frame, which is in high demand and for which there is not much competition, is only sold in the South West.

Maldi Apparels is a well-established sole proprietorship, which makes Fishing Apparels for fisherman and are sold nationally. However, at the present market conditions, their flagship product, the voyage sweat absorbent long sleeved T-shirts, which is high in demand and for which there is not much competition, is only sold only in the Central Male region.

The company is planning to produce 150,000 units per year for the next three years to satisfy demand. The companys production fixed costs are estimated at $1,500,000 per annum. This product will sell for $50 per unit with estimated variable production costs per unit as follows:

	$
Variable material	10.00
Variable labour	15.00
Variable production overheads	5.00
Total	30.00

Napoe expects selling and administration costs, which are all fixed, to be $300,000 per annum.

The estimates for the three-year period are as follows:

	Year 1	Year 2	Year 3
Opening stock	-	-	30,000
Production	150,000	170,000	140,000
Sales	150,000	140,000	160,000
Closing stock	-	30,000	10,000

The marketing director, together with the companys accountant, has been asked to assess the viability and profitability of this proposal. They are not sure whether to use absorption costing or marginal costing.

Requirements:

1. Prepare income statements for each year, using absorption accounting, clearly showing the opening and closing stock values.

(12 marks)

2. Produce income statements for each year using marginal costing, clearly showing the opening and closing stock values.

(8 marks)

3. Examine fully your results in part a) and b) above and suggest, with reasons, which of the two alternatives is the more appropriate.

(5 marks)

4. As a Management Accountant, explain why you have to be careful in using an Absorption Costing system for management accounting purposes?

(5 Marks)

(Total 30 marks)