Question 5: Variable costing (20 marks in total)

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

	$
Direct material 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 work in process inventories at the beginning or end of the year.

Required

1. Prepare an income statement for Slumberworld for the current year using:
   1. absorption costing
   2. variable costing
2. Which costing method, absorption costing or variable costing, shows a higher operating profit? Why?
3. What would be Slumberworld's finished goods inventory cost on 31 December, under:
   1. absorption costing
   2. variable costing
4. Which costing method, variable or absorption, would you recommend to Slumberworld's management? Why?