Comparison of variable costing and absorption costing. Consider the following data:

REQUIRED 1. ‘Tim Monk, president of Monk Company, has asked you to explain why the operating income for 2010 is less than for 2009, even though sales have increased 40% over last year.
What will you tell him?
2. At what percentage of denominator level was the plant operating during 2010?
3. Prepare a numerical reconciliation and explanation of the difference between the operating incomes under absorption costing and variable costing.
4. Critics have claimed that a widely used accounting system has led to undesirable buildups of inventory levels.

a. Is variable costing or absorption costing more likely to lead to such buildups? Why?

b. What can be done to counteract undesirable inventory buildups?LO1

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Monk Company Income Statement for the Year Ended December 31, 2010 Variable Costing Absorption Costing Revenues $8,400,000 $8,400,000 Costs of goods sold (at standard) 4,392,000 5,490,000 Fixed manufacturing overhead 1,200,000 Manufacturing variances (all unfavourable); Direct materials price and efficiency 60,000 60,000 Direct manufacturing labour price and efficiency 72,000 72,000 Variable manufacturing overhead spending and efficiency 36,000 36,000 Fixed manufacturing overhead: Spending 120,000 120,000 Production volume 480,000 Total marketing costs (all fixed) 1,200,000 1,200,000 Total administrative costs (all fixed) 600,000 Total costs Operating income 7,680,000 $ 720,000 600,000 8,058,000 $ 342,000