Question
SECTION B APPLICATION QUESTION Q1: Variable and Absorption Costing Total marks for this question: 25 marks [Suggested time: 35 minutes] Blackwood Pty Ltd.s planned production
SECTION B APPLICATION QUESTION
Q1: Variable and Absorption Costing Total marks for this question: 25 marks [Suggested time: 35 minutes]
Blackwood Pty Ltd.s planned production for the current year was 20 000 units. This production level was achieved, but only 17 500 units were sold at $72 each. Other data are as follows:
Direct materials used $145 000
Direct labor cost incurred 80 000
Fixed manufacturing overhead (actual & planned 105 000 Variable manufacturing overhead (actual & planned) 42 000
Fixed selling and administrative expenses 100 000
Variable selling and administrative expenses 16 800
Finished goods inventory, 1 January None
The company uses normal costing. There were no work in process inventories at the beginning or end of the year.
REQUIRED: Show ALL workings
1. Calculate the cost per unit under:
i. variable costing system (2m)
ii. absorption costing (3m)
2. Prepare an income statement for Blackwood for the current year using:
i. Variable costing (7m)
ii. Absorption costing (6m)
3. Which costing method, absorption costing or variable costing, shows a higher operating profit? Why? (3m)
4. Which costing method, variable or absorption, would you recommend to Blackwoods management? Explain. (4m)
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