QUESTION 3

WCC Sdn Bhd manufactures metal cans used in the food-processing industry. A case of cans sells for RM50. The variable cost of production for one case of cans are as follows:

Direct material = RM15

Direct labour = 5

Variable manufacturing overhead = 12

Total variable manufacturing cost per case = RM32

Variable selling and administrative cost amount to RM1 per case. Budgeted fixed manufacturing overhead is RM800,000 per year and fixed selling and administrative cost is RM75,000 per year.The following data pertains to the company's first three years of operation.

201320142015

Planned production (in units)80,00080,00080,000

Finished goods inventory (units), 0020,000

January 1

Actual production( in units)80,00080,00080,000

Sales (in units)80,00060,00090,000

Finished goods inventory (in units), 020,00010,000

December 31

Actual costs were the same as the budgeted costs.

Required:

a.Prepare income statements for WCC for the first three years of operation using (i) absorption costing and (ii) variable costing.

(16marks)

b.Reconcile operating income of WCC reported under absorption costing and variable costing for each of its first three years of operation.

(3marks)

c.Explain why some management accountants believe that absorption costing may provide an incentive for managers to overproduce inventory.

(5 marks)