Audumla Oy began operations in 2018 and differs from Ginnungagap (described in Exercise 7.22) in only one respect: it has both variable and fixed manufacturing costs. Its variable manufacturing costs are €7 per tonne, and its fixed manufacturing costs are €140,000 per year. The denominator level is 20,000 tonnes per year. 

Required 

1. Using the same data as in Exercise 7.22 except for the change in manufacturing cost behaviour, prepare income statements with adjacent columns for 2018, 2019 and the two years together, under (a) variable costing and (b) absorption costing. 

2. Why did Audumla have operating profit for the two-year period when Ginnungagap in Exercise 7.22 suffered an operating loss? 

3. What value for stock would be shown in the balance sheet as at 31 December 2018 and 31 December 2019 under each method? 

4. Assume that the performance of the top manager of the company is evaluated and rewarded largely on the basis of reported operating profit. Which costing method would the manager prefer? Why?

Data From Exercise 7.22

It is the end of 2019. Ginnungagap Oy began operations in January 2018. The company is so named because it has no variable costs. All its costs are fixed; they do not vary with output. Ginnungagap is located on the bank of a river and has its own hydroelectric plant to supply power, light and heat. The company manufactures a synthetic fertiliser from air and river water and sells its product at a price that is not expected to change. It has a small staff of employees, all hired on a fixed annual salary. The output of the plant can be increased or decreased by adjusting a few dials on a control panel. 

The following are data regarding the operations of Ginnungagap Oy: 

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2018 2019* Sales (units) Production (units) 10 000 10 000 20 000 Selling price per tonne Costs (all fixed): Manufacturing Marketing and administrative €30 €30 €280 000 €280 000 €40 000 €40 000 Management adopted the policy, effective from 1 January 2019, of producing only as much product as was needed to fill sales orders. During 2019, sales were the same as for 2018 and were filled entirely from stock at the start of 2019.