Refer to the data in Exercise 8 1 for Bharat Bicycle
Refer to the data in Exercise 8–1 for Bharat Bicycle. An absorption costing income statement prepared by the company’s accountant appears below:
In Exercise
Units in beginning inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Units produced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Units sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Units in ending inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Variable costs per unit:
Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . R120
Direct labour. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R140
Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R50
Variable selling and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . R20
Fixed costs:
Fixed manufacturing overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R600,000
Fixed selling and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R400,000
Required:
1. Determine how much of the ending inventory of R740,000 above consists of fixed manufacturing overhead cost deferred in inventory to the next period.
2. Prepare an income statement for the year using the variable costing method. Explain the difference in operating income between the two costing methods.
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