Income Measurement and Reporting

Numerical Questions

1. Mr. Goet, a newly appointed CFO of Nepalgunj Manufacturing Company, assigned his
subordinate to prepare income statement for reporting purpose from the following information
Selling price per unit Rs. 30
Sales 16,000 Units
Production 20,000 Units
Closing Stock 6,000 Units
Direct Material Rs. 10 per unit
Direct Labour Rs. 5 per unit
Variable manufacturing cost Rs. 2 per unit
Variable selling cost Rs. 5 per unit
Variable administrative cost Rs. 4 per unit
Fixed manufacturing cost Rs. 40,000
Fixed selling cost Rs. 30,000
Fixed administrative cost Rs. 20,000
Required:
i. Prepare an income statement reporting internal user of financial information.
ii. Prepare an income statement reporting external user of financial information.
iii. Reconciliation statement showing the causes of difference in net income.

2. The Alpha manufacturing company produces 80,000 units of a new product during 2010 and
sold 60,000 units at Rs. 25 each. Costs and other related information for 2010 were as follows:
Fixed cost Variable cost
Direct material - Rs. 480,000
Direct Labour - Rs. 400,000
Manufacturing Cost Rs. 270,000 Rs. 160,000
Selling and Administrative expenses Rs. 180,000 Rs. 120,000
Normal Capacity per annum 90,000 units.
Required:
a. Prepare comparative income statement for the year 2010 using
i. The absorption cost method
ii. The variable cost method
b. Give reasons for differences in reported net income/loss in part a.

3. A company has annual normal capacity of 150,000 DLH. During the year 2009, the company
operated at 90 percent of its capacity and sold 80,000 units @ Rs. 20 per unit. At the end of
2009, 15,000 units were in stock. The other information is given below:
Direct Material 0.5 kg @ Rs. 6
Direct Labour 1.5 DHL @ Rs 6
Variable manufacturing overhead 0.25 MH @ Rs. 4
Fixed manufacturing overhead Rs. 200,000 p.a.
Variable selling and distribution expenses 10% of Sales
Fixed selling and distribution expenses Rs. 120,000
 Income Measurement and Reporting
Numerical Questions

Required:
a. Income statement under absorption costing for the year ended 2009
b. Income statement under variable costing for the year ended 2009
c. Reconciliation statement

4. Mr. Purushottam, The CFO of Rapti Tyre Industry Pvt. Ltd. Ordered his subordinate accountant,
Mrs. Sita Sharma to determine income under variable costing for the income year 2007, 2008,
and 2009. The prevailing practice in preparing income statement was under absorption costing.
Mr. Sanu Narayan, another junior accountant had computed profit of R.s 160,000; Rs. 150,000
and Rs. 180,000 under absorption costing for accounting years respectively. The other
information from the company’s record were drawn as,
 Beginning inventory of 1st year was 4,000 units
 During 1st and 3rd year inventory had been increased by 1000 units and 500 units
respectively. However, inventories were decreased by 500 units during 2nd year.
 Standard fixed manufacturing cost of Rs. 160,000 was set for the normal production
units of 16,000 units
Required:
What amount of profit would be calculated by Mrs. Sita Sharma?

5. The Orchid co. ltd. Separates oxygen from the air, freezes it, and sells it in its solid form. Thus, its
raw material is free and it incurs only production costs all of which are fixed, since the plant is
fully automated. These production costs amount to Rs. 300,000 per year. The oxygen is sold at
Rs. 40 per unit. The company has made two forecasts of sales for the next two years, one
optimistic and one pessimistic:
2009 2010
Optimistic sales forecasts 10,000 units 30,000 units
Pessimistic sales forecasts 10,000 units 10,000
The company president has decided that production during the next two years would be 20,000
in each year under the optimistic forecast; the production would be 20,000 units in 2009 but
zero in 2010, even though fixed costs would continue under the pessimistic forecast.
Required:
a. Compute income before taxes in rupees and as a percentage of sales revenue under
absorption costing and variable costing for both sales forecasts.
b. Which costing methods should the company use? Why?