Task: Variable versus Absorption Costing
Introduction:
The Zwatch Company manufactures trendy, high-quality, moderately priced watches. As Zwatch’s senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare Zwatch’s 2007 income statement.
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Beginning inventory, January 1, 2007
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85,000 units
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Ending inventory, December 31, 2007
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34,500 units
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2007 sales
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345,400 units
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Selling price (to distributor)
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$22 per unit
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Variable manufacturing cost per unit, including direct materials
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$5.10 per unit
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Variable operating cost per unit sold
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$1.10 per unit sold
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Fixed manufacturing costs
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1,440,000
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Denominator-level machine hours
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6,000
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Standard production rate
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50 units per machine-hours
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Fixed operating costs
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$1,080,000
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Assume standard costs per unit are the same for units in the beginning inventory and units produced during the year. In addition, assume no price, spending, or efficiency variances. Any production volume-variance is written off to cost of goods sold in the month when it occurs.
Task(s):
Prepare income statements under variable and absorption costing for the year ended December 31, 2007.
Deliverables and format:
Microsoft Excel document, showing all calculations