QUESTION - BioChem produces trail mix packaged for sale in convenience stores. At the beginning of April 2015, BioChem has no inventory of trail mix. Demand for the three month period from April to June is expected to remain constant at 50,000 bags per month. However, considering the fact many of the employees take holiday in May, BioChem plans to produce 70,000 bags in April. The costs and revenues for April are expected to be as follows:

Sales revenue                                                     $6.00 per bag

Direct materials cost                                            $0.80 per bag

Direct manufacturing labour cost                           $0.45 per bag

Variable manufacturing overhead cost                   $0.30 per bag

Variable selling cost                                             2.5% of sales

Fixed manufacturing overhead costs                      $105,000 per month

Fixed administrative costs                                    $35,000 per month

Actual sales in April                                             50,000 bags

Required:

(a) Compute the unit product cost under variable costing and absorption costing

(b) Calculate the net operating income under variable costing.

(c) Prepare an income statement using absorption costing.

(d) Reconcile the variable costing and absorption costing net operating incomes in (b) and (c) above.

(e) Critics of absorption costing have increasing emphasised its potential for leading to undesirable incentives for managers. State two ways of reducing the negative aspects associated with using absorption costing to evaluate the performance of plant manager.