Reference no: EM132842712

Problem - Miss Becky Tooting began to trade in 2016 producing racing bicycles. Her accountants, Balham Stockwell & Co have drawn up accounts for the business but she is not entirely convinced these accounts give an accurate picture of the performance of the business for decision-making purposes. Hence, Becky has asked you to look at the accounting records and draw up alternative income statements for 2016 and 2017.

The selling price of each bicycle was $500 per unit in 2016 and $550 in 2017.

	2016	2017
Sales (units)	3,000	4,000
Production (units)	3,800	3,600
	$	$
Costs:
Factory: Fixed	570,000	590,000
Factory: variable	478,800	330,000
Administration: fixed	200,000	220,000
Selling: variable	180,000	240,000

Becky values inventory on a FIFO basis.

Required -

(a) Prepare income statements using absorption costing, for each of the years 2016 and 2017.

(b) Prepare income statements using marginal costing, showing clearly your calculation of contribution, for each of the years 2016 and 2017.

(c) Reconcile to profits calculated on a marginal costing basis with the profits calculated on an absorption costing basis for 2016 only. You are required to reconcile the figures with a numerical computation and also to explain the difference in a brief written statement for the directors of the business.