(Convert variable to absorption) The April 2010 income statement for Fabio's Fashions has just been received by Diana Caffrey, Vice-President of Marketing. The firm uses a variable costing system for internal reporting purposes.
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Fabio's Fashions
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Income Statement
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For the Month ended April 30, 2010
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Sales
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$14,400,000
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Variable standard cost of goods sold
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(7,200,000)
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Product contribution margin
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$ 7,200,000
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Fixed expenses
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Manufacturing (budget and actual)
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$4,500,000
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Selling and administrative
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2,400,000
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(6,900,000)
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Income before tax
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$ 300,000
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The following notes were attached to the statements:
- Unit sales price for April averaged $144.
- Unit manufacturing costs for the month were:
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Variable cost
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$ 72
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Fixed cost
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30
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Total cost
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$102
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- The predetermined OH rate for fixed manufacturing costs was based on normal • monthly production of 150,000 units.
- April production was 7,500 units in excess of sales.
- April ending inventory consisted of 12,000 units.
a. Caffrey is not familiar with variable costing.
1. Recast the April income statement on an absorption costing basis.
2. Reconcile and explain the difference between the variable costing and the absorption costing income figures.
b. Explain the features of variable costing that should appeal to Caffrey.