Question

Question 2 SAS Corporation manufactures and sells a single product which known as takraw ball. The absorption costing income statements for the SAS Corporation for 2016 and 2017 are shown below: SAS Corporation Income Statement - Absorption Costing for the years ending December 31, 2016 2017 RM RM Sales 120.000 120,000 Less: Cost of goods sold 66,000 63,000 Gross margin 54.000 57.000 Less: Marketing and administrative costs 51,600 51.600 Net Income 2.400 5,400 Sales and production data are as follows: Units sold Unit produced 2016 3.000 3,000 2017 3,000 4.000 Fixed manufacturing overhead is allocated to production on the number of units produced. Fixed manufacturing cost is RM12,000 yearly. Marketing and administrative costs: Variable marketing costs Fixed marketing costs Fixed administrative costs 8% of sales RM10,800 RM31,200 Variable manufacturing cost per unit: Direct materials Direct labour Variable manufacturing overhead RM6 RM9 RM3 Required: (a) Determine the cost of producing a single unit of takraw ball under absorption costing and variable costing for both 2016 and 2017. (6 marks) (b) Prepare variable costing income statements for the SAS Corporation for both 2016 and 2017. (6 marks) (c) Reconcile the operating income for 2017. (3 marks) (d) Explain in DETAILS why operating income under absorption costing for 2017 is higher than the operating income for 2016 although the number of units sold in each year is the same. (5 marks) (e) In your opinion, between the two methods, which one is mostly applied for short-term managerial decisions? Explain your choice with ONE example of a real company (i.e. AirAsia). (5 marks) [Total : 25 marks

Answer 1

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D Cost of production Absorption costing 2016 Variable costing Direct materiale Disect Labour vari mane oh 18000 18000 (GX2000) (6X3000) 27000 27000 (9x3000) (9x3000) 9000 9000 (3x3000) (3x3000) 9600 9600 (120000X82) (120000X27._ - Vari marketing costs Total variable costl 63600 63600 Fixed cost fixed mane cost 10800 Fixed admin cosle 21200 Eixed many overhead 12000 10900 31200 9000 Total Fixed cost 54000 51000 Total cost Units sold Unit cost 117600 2000 39.2 (11 7600) 3000 114600 3000 38.2 (12460o) 3000

Variable costing Pirect material i Direct labour Variable manu OH Variable mkt cost (Rm) 2016 1 18000 27000 | G000 (Rm) 2017 18000 27000 Gooo 9600 9600 Total variable cost 63600 63600 Units ean Per unit cost in 3000 1 2102 3000 Q1.2 na

O Variable costing code odba online destes Variable costing Income statement 2016 (Rm) 120000 2017 (RM) 20000 Sales 18000 Less: Variable cost (Refer ") Direct matorials Direct labour Vari mane ott Vari mkt cost Total variable cost 27000 9000 9600 63600 18000 27000 gooo 9600 63600 e Income Contribution 564005 6400

c) Reconciliation of operating income 2016 l 2017 Income Contribution 56400 56400 Less: Fixed cost Fixed Fixed Fixed mane cost admis cost many oH 10800 31200 12000 10800 31200 gooo 5900 Operating income nel 2900 income

d) The operating income an 20th is higher in case of absorption costing even though sale cie same The reason je "allocation Of kixed @manufacturing Queshead based on production I year 2016 2000 units are produced . Hence RD4 ( 12000 3000 units allocated per unit of sales. In year 2017 4000 units are produced for seme RM12000 fixed cost but only 3000 units sold Hence the tixed overhead absorption late ies Rm3 ( 12000 telewhich . 4000 rets to allocated to 3000 units sote Thus the difference arises year 2016 (3000x4) = RM 12000 year 2017 = Rm gooo (3000 XRM3) Difference = RM 3000