Sleepsound Pty Ltd’s planned production for the current year was 15,000 units. This production was achieved, but only 13,500 units were sold at $60 each. Other data are as follows:

Direct materials used………………………………………………$120,000

Direct labour cost incurred……………………………………………60,000

Fixed manufacturing overhead (actual and planned) ………………..75,000

Variable manufacturing overhead (actual and planned)………………36,000

Fixed selling and administrative expenses……………………………90,000

Variable selling and administrative expenses…………………………13,500

Finished goods inventory, 1 January……………………………………None

The company uses normal costing. There were no works in process inventories at the beginning of the year.

Required:

1. Prepare an income statement For Sleepsound for the current year using:

(a) Absorption costing.

(b) Variable costing.

2. Which costing method, absorption costing or variable costing, shows a higher operating profit? Why?

3. What would be Sleepsound’s finished goods inventory cost on 31 December, under:

(a) Variable costing?

(b) Absorption costing?

4. Which costing method, variable or absorption, would you recommend to Sleepsound’s management? Explain.



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