Reference no: EM132594331

Asaka Co. manufactures metal cans used in food-processing industry. A case of cans sells for RM15. The variable costs of production for one case of cans are as follows:

Direct material = RM4.20

Direct labour = RM1.60

Variable manufacturing overhead RM3.00

Total variable manufacturing cost per case RM8.80

Variable selling and administrative costs amount to RM0.50 per case. Budgeted fixed manufacturing overhead is RM110,000 per year, and fixed selling and administrative cost is RM45,500 per year. The following data pertain to the company's first year (Year 1) of operation:

Production (in cases) = 50,000

Sales (in cases) = 40,000

Finished-goods inventory (in cases), January 1 = 0

Finished-goods inventory (in cases), December 31 = 10,000

Required:

Question a. What is statement of profit or loss for Asaka Co. for Year 1 using (i) absorption costing and (ii) variable costing.

Question b. Reconcile Asaka's operating income for Year 1 reported under absorption and variable costing.

Question c. Suppose that during Asaka's second year of operation (Year 2), the production (in cases) is as many as in Year 1, and the company ends the year with no inventory on hand. Which costing method, absorption or variable, would show a higher operating income for the year? By what amount?

Question d. Refer to your answers in Requirement (a) and (c). Explain why there are differences in operating income reported under absorption and variable costing.

Question e. "Absorption costing may provide an incentive for managers to overproduce inventory". Do you agree? Why or why not?