SECTION B APPLICATION QUESTION

Q1: Variable and Absorption Costing Total marks for this question: 25 marks [Suggested time: 35 minutes]

Blackwood Pty Ltd.s planned production for the current year was 20 000 units. This production level was achieved, but only 17 500 units were sold at $72 each. Other data are as follows:

Direct materials used $145 000

Direct labor cost incurred 80 000

Fixed manufacturing overhead (actual & planned 105 000 Variable manufacturing overhead (actual & planned) 42 000

Fixed selling and administrative expenses 100 000

Variable selling and administrative expenses 16 800

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: Show ALL workings

1. Calculate the cost per unit under:

i. variable costing system (2m)

ii. absorption costing (3m)

2. Prepare an income statement for Blackwood for the current year using:

i. Variable costing (7m)

ii. Absorption costing (6m)

3. Which costing method, absorption costing or variable costing, shows a higher operating profit? Why? (3m)

4. Which costing method, variable or absorption, would you recommend to Blackwoods management? Explain. (4m)