Reference no: EM132767323
Problem - A manufacturing company with a single product has the following sales and production results over three ?nancial periods:-
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Period 1 (units)
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Period 2 (units)
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Period 3 (units)
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Sales
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50,000
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60,000
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40,000
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Production
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70,000
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40,000
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60,000
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The selling price per unit has remained at $10. The direct material cost per unit is $3 and the direct labour costs per unit is $2. All manufacturing overheads are allocated into product cost at predetermined rates per unit of output. Any under/over applied balances are transferred to the statement of pro?t or loss in the period in which they are incurred. Variable manufacturing overhead applied was determined at a rate of $1 per unit in each period. Fixed manufacturing overheads were expected to be $180,000 per period. Normal capacity is 60,000 units of output per period.
Manufacturing overheads actually incurred were as follows:-
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Period 1
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Period 2
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Period 3
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Variable
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$70,000
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$40,000
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$60,000
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Fixed
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$180,000
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$180,000
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$180,000
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Assume that no further overheads are incurred (i.e. other than manufacturing overheads).
Required -
(i) Calculate the expected break-even point per period.
(ii) Calculate the pro?t/loss that arose in each of the three periods under absorption costing.
(iii) Calculate the contribution margin that arose in each of the three periods under variable costing.
(iv) Reconcile your answers to (ii) and (iii) above, clearly demonstrating and explaining the reasons for any difference encountered.
(v) Explain the reason why there are differences in operating income between variable costing and absorption costing.