Folegandros Ltd produces and sells souvenirs for all Greek islands. The costing information from the last three years is as follows:

Required
1. Calculate the cost per unit under variable costing and absorption costing.
2. Calculate the cost per unit under absorption costing. Prepare the cost per unit each year under absorption costing.
3. Prepare profit or loss statements for three years under variable and absorption costing.
4. Reconcile the net difference (closing inventory less opening inventory) between absorption and variable costing in the value of inventory for each year. Use absolute value.
5. Show the composition of cost of production based on fixed overhead and variable cost for each year. You need to work with units and money.
6. Each year, some closing inventory was carried forward to the next year. Despite this, absorption costing presents lower profits in Years 1 and 2. Explain the reasons.

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Units produced Units sold Direct material Direct labour Variable production overhead Fixed cost Production overheads* Selling and Administrative expenses** Selling price Opening inventory *** Year 1 14,286 15,000 *Fixed production overhead varies according to production every year. **All selling and administrative expenses are fixed. ***Opening inventory carried fixed production overhead valued at 7 per unit. Year 2 20,000 20,000 7.00 5.00 3.00 100,000 29,000 25.00 3,000 Year 3 25,000 19,000 per unit per unit per unit units