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Maurine Ltd uses an absorption costing system based on standard costs.

Maurine Ltd uses an absorption costing system based on standard costs. Total variable manufacturing cost, including direct materials cost, is $3 per unit; the standard production rate is 10 units per machine‐hour. Total budgeted and actual fixed manufacturing overhead costs are $420 000. Fixed manufacturing overhead is allocated per machine‐hour of 60 000 hours. Selling price is $5 per unit. Variable operating (non‐manufacturing) cost, which is driven by units sold, is $1 per unit. Fixed operating (non‐manufacturing) costs are $120 000. Beginning inventory in 2017 is 30 000 units; ending inventory is 40 000 units. Sales in 2017 are 540 000 units. The same standard unit costs persisted throughout 2016 and 2017. For simplicity, assume that there are no price, spending or efficiency variances.

Required: (a) Prepare an income statement for 2017 assuming that the production volume variance is written off at financial year‐end as an adjustment to cost of goods sold. (16 marks)

(b) The manager has heard about variable costing. He asks you to recast the 2017 statement as it would appear under variable costing. (16 marks)

(c) Explain the difference in operating profit as calculated in requirements 1 and 2.

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