Reconcile operating income of wcc reported

Reference no: EM132973640

Question: WCC Sdn Bhd manufactures metal cans used in the food-processing industry.
A case of cans sells for RM50. The variable cost of production for one case of cans are as follows:
Direct material = RM15
Direct labour = 5
Variable manufacturing overhead = 12
Total variable manufacturing cost per case = RM32

Variable selling and administrative cost amount to RM1 per case. Budgeted fixed manufacturing overhead is RM800,000 per year and fixed selling and administrative cost is RM75,000 per year.The following data pertains to the company's first three years of operation.

                                                                      2013                                    2014                                            2015

  Planned production (in units)            80,000                                 80,000                                         80,000

  Finished goods inventory (units),      0                                          0                                                     20,000
  January 1

  Actual production( in units)               80,000                              80,000                                            80,000

  Sales (in units)                                      80,000                              60,000                                            90,000

  Finished goods inventory (in units), 0                                         20,000                                          10,000
   December 31

Actual costs were the same as the budgeted costs.

Required:

a. Prepare income statements for WCC for the first three years of operation using (i) absorption costing and (ii) variable costing.

b. Reconcile operating income of WCC reported under absorption costing and variable costing for each of its first three years of operation.

c. Explain why some management accountants believe that absorption costing may provide an incentive for managers to overproduce inventory.

Reference no: EM132973640

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