SMJ Bakeries produces and sells health breads in mixed packages.

The firm uses variable

costing for internal management purposes and absorption costing for external purposes. At the
end of each year, financial statements must be converted from variable to absorption costing to
satisfy external requirements.

At the end of 2016, it was anticipated that sales would increase by 50% from the 2016 levels for
2017due to the change in healthy eating. Production was expected to be increased to meet this
expected demand. The increase in production gave rise to a favorable materials price variance as
a result of bulk discounts.
The following data relates to the years 2016and 2017:

2016 2017
Selling price per package $30 $30
Sales (packages) 30,000 45,000
Beginning inventory 2,000 12,000
Production 40,000 50,000
Ending Inventory 12,000 ?
Direct material price variance $4,000F $8,000F
Other variable production variances $7,500U $12,000U

Standard variable cost per case for 2016 and 2017

Direct material $ 3.50

Labor 12.00
Overhead 1.00
Variable selling and admin 6.00

Annual fixed cost for 2016 and 2017 actual and budgeted were:
Production $160,000
Selling and administration 80,000

The fixed overhead rate under absorption costing is based on a practical capacity of 40,000 units
per year. All variances and under or overapplied overhead are written off to cost of goods sold.

Required

a) Prepare Income Statements for the year 2017 using (i) Absorption, (ii)Variable costing
and (iii) Throughput costing. (18 Marks)
b) Reconcile the Absorption costing and Variable costing incomes. (2 Marks)
c) Calculate the break-even point under Absorption costing. (2 Marks)
d) How can Absorption costing be used to by managers to support their dysfunctional
behavior? (3 Marks)