Comparison of Full- Absorption and Variable Normal Costing in a Process Operation: After a dispute with the
Question:
Comparison of Full- Absorption and Variable Normal Costing in a Process Operation: After a dispute with the company president, the controller of the Lance Company resigned. At that time, his office was converting the internal reporting system from full-absorption to variable costing. You have been called in to prepare financial reports for last year. A considerable amount of data are missing, but you piece together the following information.
1. The company manufactures valves, which pass through one department. All materials are added at the beginning of production, and processing is applied evenly throughout the department. There is no spoilage. FIFO costing is used.
2. From the marketing department, you learn that 90,000 units were sold at a price of $20 each during last year.
3. From various sources, you determine that variable manufacturing overhead was $330,000 and fixed manufacturing overhead was $210,000 for last year. Nonmanufacturing costs (all fixed) were $580,000.
4. In one of the former controller's desk drawers, you discover the draft of a report with the following information:
a. "The present accounting system uses the normal costing approach for both internal and external reporting. We write off over- or underapplied overhead as part of cost of goods sold rather than allocate it to inventories."
b. "Equivalent unit costs during the year and in beginning inventories were: $4 per unit for materials costs and $2 per unit for direct labor. Variable overhead is applied at $3 per unit and fixed overhead at $2 per unit."
c. "110,000 units were transferred from work in process inventory to finished goods inventory. 120,000 units of materials were purchased and 115,000 units requisitioned to work in process inventory."
d. Inventory summary (in units):
Required:
a. Show the flow of whole units, including units started in work in process in- ventory, transferred to finished goods, and sold. Be sure to include both beginning and ending inventories.
b. Show the flow of manufacturing costs during the year, including beginning and ending inventories, using full-absorption normal costing.
c. Prepare income statements using:
(1) Full-absorption normal costing. (2) Variable normal costing.
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