Question

QUESTION 3: ABSORPTION AND VARIABLE COSTING, INVENTORY MANAGEMENT StylePaints is a business that manufactures paint that is specifically used to paint motor vehicles. The paint is sold in buckets of 5 litres each. The costs associated with manufacturing a 5 litre bucket of paint in the past year were as follows:

Direct materials 150

Direct labour 300

Variable overhead 105

Variable selling and administrative expenses 50

Fixed overhead rate* 45

*Assume that this applied fixed overhead rate has been constant for the past three years. Total fixed selling and administration costs for the year amounted to R70 000. In the past year, the company sold 8 000 litres at a price of R950 per bucket. At the beginning of the year, StylePaints had 1 000 litres of paint in stock and at the end of the year, they had 1 150 litres of paint remaining.

Calculate the inventory product cost per 5 litre bucket using the variable costing method.

b) Prepare an income statement (profit and loss account) for the past year, 2019 using the variable costing approach.

c) Without preparing an income statement, calculate the operating income under absorption costing

Answer 1

In this question 8000 litres means 1600 buckets

In the varibale cost approch fixed overhead distributed for total production units absorption method it is distribited to total sales units