Zemanova plc makes wooden chicken coops and its sales are very seasonal. Zemanovas production manager Veronika is
Question:
Zemanova plc makes wooden chicken coops and its sales are very seasonal. Zemanova’s production manager Veronika is trying to prepare budgets for next year. For this purpose she divides the year into two six-monthly periods, to allow for holidays and seasonal sales. The variable production cost of a coop is as follows, based on a budgeted production level of 50,000 coops per annum.
£
Variable materials 40.00
Variable labour (5 hours) 60.00
Variable overheads 8.00
Fixed production costs are budgeted to be £900,000 per annum. In addition to the production costs, sales commission of 20% of selling price is paid on each coop sold. The selling price is £250. Fixed selling and distribution costs amount to £1,500,000 per annum.
Sales and production figures are budgeted as follows.
January to June July to December
Coops sold 0 50,000
Coops produced 30,000 20,000
There will be no opening inventory in January. Fixed costs are incurred evenly throughout the year.
Requirements:
(a) Prepare income statements, clearly showing inventory values for each six monthly period using
- marginal costing
- absorption costing.
(b) Prepare a statement which reconciles the income for each six monthly period calculated in (a).
(c) Discuss the advantages and disadvantages of marginal and absorption costing and recommend which of these should be used given Zemanova’s circumstances.
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus