Question $6$

The Mavis Company uses an absorption costing system based on standard costs. Total variable manufacturing costs, including direct materials cost is R$3$ per unit; the standard production rate is $10$ units per machine hour. Total budgeted and actual manufacturing overhead costs are R$420000.$ Fixed manufacturing overhead is applied at R$7$ per machine hour $($R$420000/60000$ machine hours$).$ The selling price is R$5$ per unit. Variable operating cost, which is driven by units sold, is R$1$ per unit. Fixed operating costs are R$120000.$ Beginning inventory in $2007$ is $30000$ units: ending inventory is $40000$ units. Sales in $2007$ are $540000$ units. The same standard unit costs persisted throughout $2006$ and $2007.$ For simplicity, assume there are no price, spending or efficiency variances.

Required:

$6\mathrm{.}1$ Prepare an income statement for $2007$ assuming that the production volume variance is written off at year end as an adjustment to cost of goods sold.

$6\mathrm{.}2$ The president heard about variable costing. She asks that you recast the $2007$ statement as it would appear under variable costing.

$6\mathrm{.}3$ Reconcile the profits.