years 2019 and 2020. $ Per Unit Sales price Direct material cost Direct wages Variable production overhead Variable administrative costs (per unit sold) Per annum: Fixed production overhead Fixed selling and administrative expenses 19.50 5.20 6.50 1.30 2.50 $390 DOO $104 000 Normal activity level: 195 000 units per annum Variable selling cost: 3% of sales On January 1, 2019, the company had 3,000 units in stock. During the year, ECC produced 180,000 units and sold 181,000. In 2020, the company produced 5% more units, but sales volume declined by 4%. Required: 2019 a) Prepare the income statement for and 2021 using the marginal casting method and the absorption casting method. b) Prepare the reconciliation statement for each year. c) Donovan Garvey, the manager of ECC Limited is not clear as to why the firm should use two different bases for the preparation of financial statements. He is also concerned that the net income and stock valuations differ with the two methods. Write a well-formatted memo to the manager. This memo should: a. Give THREE arguments to support the uses of marginal costing b. Give THREE arguments to support the uses of absorption costing c. Explain the impact of the treatment of overheads on stock valuation and net profit for EACH of the two years under both methods. years 2019 and 2020. $ Per Unit Sales price Direct material cost Direct wages Variable production overhead Variable administrative costs (per unit sold) Per annum: Fixed production overhead Fixed selling and administrative expenses 19.50 5.20 6.50 1.30 2.50 $390 DOO $104 000 Normal activity level: 195 000 units per annum Variable selling cost: 3% of sales On January 1, 2019, the company had 3,000 units in stock. During the year, ECC produced 180,000 units and sold 181,000. In 2020, the company produced 5% more units, but sales volume declined by 4%. Required: 2019 a) Prepare the income statement for and 2021 using the marginal casting method and the absorption casting method. b) Prepare the reconciliation statement for each year. c) Donovan Garvey, the manager of ECC Limited is not clear as to why the firm should use two different bases for the preparation of financial statements. He is also concerned that the net income and stock valuations differ with the two methods. Write a well-formatted memo to the manager. This memo should: a. Give THREE arguments to support the uses of marginal costing b. Give THREE arguments to support the uses of absorption costing c. Explain the impact of the treatment of overheads on stock valuation and net profit for EACH of the two years under both methods
