Year 1 Year 2

Units Units
Production quantity 10,000 10,000
Sales quantity 9,000 11,000
Opening inventory Nil 1,000

Selling price per unit: $80 $80

Production costs: Per unit Per unit
Direct materials $15 $15
Direct labour $5 $5
Variable overhead $28 $28
Fixed overhead $180,000 in total $180,000 in total

Non-production costs:
Variable selling and admin overheads $3 per unit sold $3 per unit sold
Fixed selling and admin overheads $70,000 in total $70,000 in total
1. Income statement (absorption costing)
Year 1 Year 2
$ $ $ $
Sales 720,000 880,000
Less: Cost of goods sold
Opening inventory - 66,000
Add: Production costs
Direct materials 150,000 150,000
Direct labour 50,000 50,000
Variable overhead 280,000 280,000
Fixed overhead 180,000 180,000
660,000 726,000
Less:
Closing inventory (66,000) -
594,000 726,000
Gross Profit 126,000 154,000
Less: Non-production costs
Fixed selling and administrative overhead (70,000) (70,000)
Variable selling and administrative overhead (27,000) (33,000)
29,000 51,000

2. Income statement (variable costing)

Sales 720,000 880,000

Less: Variable cost of sales
Opening inventory - 48,000
Variable production costs:
Direct material 150,000 150,000
Direct labour 50,000 50,000
Variable overhead 280,000 280,000

Less: Closing inventory (48,000) -

Variable selling and administrative overhead 27,000 33,000

459,000 561,000
Contribution Margin 261,000 319,000
Less: Fixed costs
Fixed production overhead 180,000 180,000
Fixed selling and administrative overhead 70,000 70,000
250,000 250,000
11,000 69,000

Inventory movement: AC VC Different

Closing inventory in Year 1 (66,000) (48,000)
Opening inventory in Year 1 - -
Difference (66,000) (48,000) (18,000)
- -
Closing inventory in Year 2 - -
Opening inventory in Year 2 66,000 48,000
Difference 66,000 48,000 18,000
Total
$
1,600,000

66,000

300,000
100,000
560,000
360,000
1,386,000

(66,000)
1,320,000
280,000

(140,000)
(60,000)
80,000

1,600,000

48,000

300,000
100,000
560,000

(48,000)

60,000

580,000

360,000
140,000

80,000