QUESTION TWO

Pink $($Pty$)$ Ltd is considering changing its method of inventory valuation from the absorption costing

to direct costing and consulted you to determine the effect of this proposed change on the $2022$

financial statements.

The company manufactures a Purple, which is sold for R$20$ per unit. Production capacity is budgeted

at $100000$ units of Purple annually. At this level of production, the costs per unit are:

Selling expenses for the $100000$ units are

Variable selling costs

Fixed advertising costs

Opening stock on $1$ January $2022$

Production for $2022$

Sales

R$1$

$R0\mathrm{.}50$

$5000$ units

$80000$ units

$60000$ units

Required:

$2\mathrm{.}1$ Prepare a Statement of Financial Performance on a variable cost basis with an adjustment

for the change in the inventory valuation.

$2\mathrm{.}2$ Discuss with calculations what the effect on the profit of Blue Incorporate would be if the

absorption cost basis was applied.