Salman Establishment started a business in 2019 producing racing boats. As the accountant of the company, you have been asked to look at the accounting records and draw up alternative income statements for 2019 and 2020.

 

	2019	2020
Sale price £	600	650
Sales ( units)	4,000	5,000
Production ( units)	4,800	4,600
	£	£
Costs
Factory: Fixed	590,000	610,000
Factory: Variables	485,000	350,000
Administration: Fixed	220,000	240,000
Selling: variable	185,000	245,000

 

Requirements:

(a) Prepare income statements using absorption costing, for each of the years 2019 and 2020. Use an excel sheet to demonstrate your workings.

(b) Prepare income statements using marginal costing, showing clearly your calculation of contribution, for each of the years 2019 and 2020. - Use an excel sheet to demonstrate your workings. 

( c ) Explain three methods under absorption costing that managers can use to improve operating income.

 (d ) To increase production, a manager may defer maintenance beyond the current period.  Briefly explain why many companies use absorption costing for external reporting as well as internal accounting.

 ( e ) The breakeven points are the same under both variable costing and absorption costing. Do you agree or Disagree? Explain.