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Question No. 02.

Good-Fit Garment Industry was established on July 01, 2018 who is manufacturing and marketing designer garments. After expiry of its first six months operations, the chief executive of the company was under considerable strain of finances. The following income statement for the first six months was prepared by the Accountant for the management:

Income statement for six months ended 31 December, 2018

Sales 2,000 dresses x Rs. 1,200 Rs. 2,400,000

Less variable cost of dresses sold:

Variable production cost Rs. 1,300,000

Variable selling expenses 300,0001,600,000

Contribution margin 800,000

Fixed expenses

Fixed manufacturing overheads Rs. 900,000

Fixed selling and administrative expenses 50,000950,000

Net operating loss (Rs. 150,000)

The chief executive of the company was discouraged over the loss shown for its half year's operation particularly because he had planned to use the income statement as support for a bank loan.

A professional management accountant, who happened to be a friend of the chief executive of the organization, suggested to redraft the income statement under absorption costing method which probably would show some moderate amount of profit. The cost data of production was scanned and following details were extracted:

Dresses produced 2,500

Dresses sold 2,000

Variable cost per dress:

Direct material Rs. 400

Direct labour Rs. 200

Factory overheads Rs. 50

Selling expenses Rs. 150

Required

a.Calculate the unit product cost under variable costing and under absorption costing.

b.Prepare income statement under absorption costing.

c.Prepare reconciliation statement for the reported results under absorption costing with the variable costing.

d.During second half of the year, the company again produced 2,500 dresses and sold 2,750 dresses with no change in the fixed cost or selling price

i. Prepare income statement under variable costing.

ii. Prepare income statement under absorption costing.

iii. Reconcile variable costing and absorption costing net operating results.

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