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audumla in 2004 audumla oy began operations in 2006 and differs from ginnungagap des 736849

Audumla in 2004.

Audumla Oy began operations in 2006 and differs from Ginnungagap (described in Exercise 7.18) in only one respect: it has both variable and fixed manufacturing costs. Its variable manufacturing costs are €7 per tonne, and its fixed manufacturing costs are

€140 000 per year. The denominator level is 20 000 tonnes per year.

1 Using the same data as in Exercise 7.18 except for the change in manufacturing cost behaviour, prepare income statements with adjacent columns for 2006, 2007 and the two years together, under (a) variable costing and (b) absorption costing.

2 Why did Audumla have operating profit for the two year period when Ginnungagap in

Exercise 7.18 suffered an operating loss?

3 What value for stock would be shown in the balance sheet as at 31 December 2006 and

31 December 2007 under each method?

4 Assume that the performance of the top manager of the company is evaluated and rewarded largely on the basis of reported operating profit. Which costing method would the manager prefer? Why?

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