QUESTION 1 Variable and absorption costing

Froggy Ltd produces ornamental garden ponds and commenced operations in 2019. For 2019, Froggy budgeted to produce and sell 20,000 units.

The company writes off under- or over-allocated overheads to Cost of goods sold. Fixed costs were as expected. Actual data for 2019 are given as follows:

Required

1. Prepare a 2018 income statement for Froggy Ltd using variable costing.

2. Prepare a 2018 income statement for Froggy using absorption costing.

3. Explain the differences in operating profit obtained in requirements 1 and 2 and reconcile the two profit figures.

4. Froggy’s management is considering implementing a bonus for the supervisors based on gross margin under absorption costing. Advise management on the potential effect of the bonus plan on the behaviour of supervisors and recommend modifications that Froggy management might make to improve the plan.