Question 4

Breccia Pty Ltd manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed manufacturing $5. Selling and administrative costs are $3 per unit sold. The selling price is $19 per unit. Actual and budgeted overhead are the same for the year. Information about the company production activity for the year is:

Sales 125,000 units

Units produced 150,000 units

Beginning Inventory 5,000 units

As part of the company cost planning and cost control of operations and activities, management is now reviewing its production activity and the potential impact of different stock-costing methods.

Required

1. What is the value of closing inventory of finished goods under absorption costing? (5 marks)

2. What is the difference in profit between absorption and variable costing and, for this specific year for this company, which of the two stock-costing methods has the higher profit and why? (6 marks)

3. For this specific company, what management should do if they are planning on improving operating profit through stock build-up and why? (5 marks)