at the beginning of 2004, Denarau Tourist Developments bought a 2000 acre island off the coast of Viti Levu for $10,000,000 and divided it into 200 equal size plots.
as the plots are sold, they are cleared at an average cost of $5000 and storm drains and driveways are installed at an average cost of $8000 per plot. sales commissions are 10% of selling price. adminstrative costs are$850,000 per year.
the average selling price was $160,000 per plot during 2004 when 50 plots were sold.
during 2005, the company bought another 2,000 acre island and developed it exactly the same way. Allotment sales in 2005 from both developments totaled300 with an average selling price of $160,000. all costs were the same as in 2004.
1) calculate the cost per plot under absorption and variable costing
2) prepare profit statements for 2005 using both absorption and variable costing methods.
3) reconcile the profit under absorption and variable costing using the detailed reconciliation method used in Langfield-Smith,et.al.Explain why the differences in profit occurred in 2005 year. show omputations.
4) Explain why under absorbtion costing method increases by just building up inventories?