Sleepsound Pty Ltd's planned production for the current year was 15,000 units. This production was achieved, but only 13,500 units were sold at $60 each. Other data are as follows:

Direct materials used......................................................$120,000

Direct labour cost incurred...................................................60,000

Fixed manufacturing overhead (actual and planned) ....................75,000

Variable manufacturing overhead (actual and planned)..................36,000

Fixed selling and administrative expenses.................................90,000

Variable selling and administrative expenses..............................13,500

Finished goods inventory, 1 January..........................................None

The company uses normal costing. There were no works in process inventories at the beginning of the year.

Required:

1. Prepare an income statement For Sleepsound for the current year using:

(a) Absorption costing.

(b) Variable costing.

2. Which costing method, absorption costing or variable costing, shows a higher operating profit? Why?

3. What would be Sleepsound's finished goods inventory cost on 31 December, under:

(a) Variable costing?

(b) Absorption costing?

4. Which costing method, variable or absorption, would you recommend to Sleepsound's management? Explain.