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 2014 income statement. The following data are for the year ended December 31, 2014:
Beginning inventory, January 1, 2014, 90,000 units
Ending inventory, December 31, 2014, 32,000 units
2014 sales 350,000 units
Selling price (to the distributor) $25.00 per unit
Variable manufacturing cost per unit, including direct materials $5.80 per unit
Variable operating (marketing) cost per unit sold $1.70 per unit sold
Fixed manufacturing costs $1,586,000
Denominator-level machine-hours 6,100
Standard production rate 50 units per machine-hour
Fixed operating (marketing) costs $1,110,000
Assume standard costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume no price, spending, or efficiency variances. Any production-volume variance is written off to the cost of goods sold in the month in which it occurs.
Requirements:
1. Prepare income statements under variable and absorption costing for the year ended December 31, 2014.
2. What is Zwatch's operating income as a percentage of revenues under each costing method?
3. Explain the difference in operating income between the two methods.
4. Which costing method would you recommend to the CFO? Why?
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 2014 income statement. The following data are for the year ended December 31, 2014:
Beginning inventory, January 1, 2014, 90,000 units
Ending inventory, December 31, 2014, 32,000 units
2014 sales 350,000 units
Selling price (to the distributor) $25.00 per unit
Variable manufacturing cost per unit, including direct materials $5.80 per unit
Variable operating (marketing) cost per unit sold $1.70 per unit sold
Fixed manufacturing costs $1,586,000
Denominator-level machine-hours 6,100
Standard production rate 50 units per machine-hour
Fixed operating (marketing) costs $1,110,000
Assume standard costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume no price, spending, or efficiency variances. Any production-volume variance is written off to the cost of goods sold in the month in which it occurs.
Requirements:
1. Prepare income statements under variable and absorption costing for the year ended December 31, 2014.
2. What is Zwatch's operating income as a percentage of revenues under each costing method?
3. Explain the difference in operating income between the two methods.
4. Which costing method would you recommend to the CFO? Why?
Related questions
Sparrow Inc. uses absorption costing in a FIFO inventory system.Sparrow had opening inventory of 170 units at a cost of $35 perunit. Ending inventory is 120 units. During 2017 Sparrow sold 1,600units at $55 each. The following costs apply to Sparrow'soperations for the year ended December 31, 2017.
| Direct material used in production | $ 12 per unit |
| Direct labour incurred | 5 per unit |
| Fixed manufacturing overhead | $ 17,050 |
| Variable manufacturing overhead | $ 4 per unit |
| Selling costs (40% variable) | $ 20,000 |
| Admin costs (10% variable) | $ 30,000 |
Round to the nearest whole number. Do not use decimals or commasin your answer.
(a) What amounts will be reported on Sparrow's Income Statementfor:
Costof goods sold $?
Gross profit $?
Period costs $?
(b) Sparrow also prepares a variable costing income statementfor internal purposes. Assume the fixed manufacturing overheadattached to each unit in beginning inventory was $14 per unit. Willtheir variable costing net income be higher or lower than underabsorption costing and by how much? and low or higher
*you'll have to calculate FMOH released from beginning inventoryAND FMOH stored in ending inventory?
The Dorset Corporation produces and sells a single product. The following data refer to the year just completed:
| Beginning inventory | 0 | |
| Units produced | 34,000 | |
| Units sold | 25,900 | |
| Selling price per unit | $ | 482 |
| Selling and administrative expenses: | ||
| Variable per unit | $ | 16 |
| Fixed per year | $ | 362,600 |
| Manufacturing costs: | ||
| Direct materials cost per unit | $ | 240 |
| Direct labor cost per unit | $ | 56 |
| Variable manufacturing overhead cost per unit | $ | 34 |
| Fixed manufacturing overhead per year | $ | 578,000 |
Assume that direct labor is a variable cost.
Required:
a. Compute the unit product cost under both the absorption costing and variable costing approaches.
b. Prepare an income statement for the year using absorption costing.
c. Prepare an income statement for the year using variable costing.
d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.
| Beginning inventory | 0 |
| Units produced | 49,000 |
| Units sold | 44,000 |
| Selling price per unit | $81 |
| Selling and administrative expenses: | |
| Variable per unit | $2 |
| Fixed (total) | $562,000 |
| Manufacturing costs: | |
| Direct materials cost per unit | $18 |
| Direct labor cost per unit | $9 |
| Variable manufacturing overhead cost perunit | $4 |
| Fixed manufacturing overhead cost(total) | $980,000 |
| Assume that the company uses variable costing. |
| (a) | Determine the unit product cost. (Omit the "$" sign in your response.) |
| Unit product cost | $ |
| (b) | Prepare a contribution format income statement for May. (Input all amounts as positive values. Omit the "$" sign in yourresponse.) |
| (Click to select)Variable manufacturing costsBeginninginventorySalesEnding inventoryGoods available for sale | $ | |
| Variable expenses: | ||
| (Click to select)Goodsavailable for saleVariable cost of goods soldSalesEndinginventoryVariable selling and administrative expenses | $ | |
| (Click to select)SalesVariableselling and administrative expensesGoods available for saleEndinginventoryVariable cost of goods sold |
|
|
| (Click to select)Variable manufacturingcostsContribution marginFixed manufacturing overheadBeginninginventoryEnding inventory | ||
| Fixed expenses: | ||
| (Click to select)Goodsavailable for saleFixed manufacturing overheadFixed selling andadministrative expensesSalesEnding inventory | ||
| (Click to select)SalesFixedmanufacturing overheadFixed selling and administrativeexpensesGoods available for saleEnding inventory |
|
|
| (Click to select)Net operating incomeNet operatingloss | $ | |
| | ||
