QUESTION 2:

ABSORPTION AND VARIABLE COSTING AND BUDGETING (TOTAL: 25 MARKS)

a. Good Toys Company produces a toy product. Data concerning the company's operations last year appear below:

Units in beginning inventory	0
Units produced	15,000
Units sold	12,000
Selling price per unit	$110
Variable cost per unit:
Direct materials	$30
Direct labour	$20
Variable manufacturing overhead	$10
Variable selling and administrative costs	$8
Fixed costs in total:
Fixed manufacturing overhead	$225,000
Fixed selling and administrative costs	$280,000

Required (show your calculations): make a variable costing income statement for the year.

(12 marks)

Type in answers to Question 2. a. (expand the space as needed)

1. Client Solutions is working on its direct labour budget for August and September. The production budget calls for producing 4,000 units in August and 2,800 units in September. Each unit of output requires 0.9 direct labour-hours. The direct labour rate is $25.00 per direct labour hour in August. However, due to an unforeseen economic situation, the direct labour rate increased to $30.00 per direct labour hour in September. The company is committed to paying its direct labour force at least 3,000 hours in total each month even if there is not enough work to keep them busy. The company pays 1.5 times of normal rate for every hour worked over 3,000 hours in a month.

Required: i) Construct the direct labour budget (in dollars) for August and September.

(8 marks)

Type in answers to Question 2. b. i. (expand the space as needed)

ii) While preparing the direct labour budget, the company's top management team usually imposes the maximum number of direct labour hour required per unit of output. However, some employees feel that this practice gives them undue stress as it does not reflect reality. These employees prefer that they set the maximum number of direct labour hours required per output unit. Do you support the top management team's viewpoint or employees' viewpoint? Explain your answer. [Maximum word limit: 125 ]

(5 marks)

Type in answers to Question 2. b. ii. (expand the space as needed)