Reference no: EM132540602

ATR Ltd manufactures sidewalk chalk which it sells online by the box

Company uses an actual costing system, which means that the actual costs of direct material, direct labour,and manufacturing overhead are entered into work-in-process inventory. The actual application rate for manufacturing overhead is computed each year; actual manufacturing overhead is divided by actual production (in units) to compute the application rat, companysuffered a loss for the first month of operations by using variable costing system. The loss created a serious problem because company was planning to use the statement to encourage investors to purchase the stock of the company.

Some other relevant data is given below:

1. Units produced during the first month: 50,000 units
2. Units sold during the first month: 40,000 units

Other data:

Direct materials: Rs.2.00 per unit
Direct labor: Rs.1.60 per unit
Variable manufacturing overhead: Rs.0.40 per unit
Variable selling and administrative expenses: Rs.1.50 per unit
Selling price Rs.40
Fixed manufacturing cost Rs.1800,000 per year
Fixed Selling & Admin expenses Rs. 480,000 per year

Required:

Question 1: How much loss was suffered by using variable costing method in the first month of operation?

Question 2: What costing method should be used by the company for preparing income statement for stock holders? And why?

Question 3: Can an absorption costing income statement show a profit rather than loss? Support your answer by preparing a reconciliation schedule.