1. Prepare the Income Statement for the month ended 29 February 2020 using the variable costing method. 2. Prepare the Income Statement for the month ended 29 February 2020 using the absorption costing method. 3. Explain why there is a difference in the net profit calculated in the two income statements (above). 4. Would you recommend that the finance manager use variable costing instead of absorption costing to determine the net profit? Motivate your answer. 5. Recommend appropriate cost drivers for each of the FIVE (5) manufacturing overheads identified by the financial manager.
Oak Manufacturers, which produces book cases, commenced trading on 02 January 2020. During the
first month of operations the sales and production volumes were 5 000 units and 5 600 units respectively.
Fixed
manufacturing costs and selling costs amounted to R60 per unit and R32 per unit respectively.
During February 2020 the sales and production dropped to 4 600 units and 5 000 units respectively. The
selling price per book case was R280. Variable manufacturing costs increased to R72 per unit whilst the
variable selling costs remained at R32 per unit. Fixed manufacturing costs increased to R82 000 but the
fixed administration costs remained at R34 000. The increase in the fixed manufacturing costs is due to
the depreciation on new machinery purchased for R130 000. The first-in-first-out method for valuing
inventories is used.
Oak Manufacturers was using the absorption costing method to prepare its income statement but the
keen on using activity-based costing for the apportionment of overheads to each of the manufacturing
departments. She identified the following costs that make up the fixed and variable manufacturing
overheads:
Indirect labour;
Electricity;
Rent expense;
Depreciation of machinery;
Supervision of employees.
REQUIRED
1. Prepare the Income Statement for the month ended 29 February 2020 using the variable costing method.
2. Prepare the Income Statement for the month ended 29 February 2020 using the absorption costing method.
3. Explain why there is a difference in the net profit calculated in the two income statements (above).
4. Would you recommend that the finance manager use variable costing instead of absorption costing to determine the net profit? Motivate your answer.
5. Recommend appropriate cost drivers for each of the FIVE (5) manufacturing overheads identified by the financial manager.
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