Income statements. (SMA) The Mass Company manufactures and sells a single product.

The following data cover the two latest years of operations:

2006 2007 Unit data:

Sales Beginning inventory Ending inventory Selling price per unit Cost data:

Standard fixed costs:

Manufacturing overhead Marketing and administrative Standard variable costs per unit:

Direct materials Direct manufacturing labour Manufacturing overhead Marketing and administrative 25,000 25,000 1,000 1,000 1,000 5,000

$ 48 $ 48

$120,000 $120,000

$190,000 $190,000

$ 12.60

$ 9.50

$ 4.00

$ 1.20 The denominator level is 30,000 output units per year. The Mass Company’s accounting records produce variable costing information, and year-end adjustments are made to produce external reports showing absorption costing information. All variances are charged to cost of goods sold.

Required 1. Prepare two income statements for 2007, one under variable costing and one under absorp¬

tion costing.

2. Explain briefly why the operating income figures computed in requirement 1 agree or do not agree.

3. Give two advantages and two disadvantages of using variable costing for internal reporting.

352 CHAPTER 9 PROBLEMS