(Convert variable to absorption) James Walton, vice president of marketing for Charming Curios, has just received the April 2000 income statement, shown below, which was prepared on a variable costing basis. The firm uses a variable costing system for internal reporting purposes.

The unit rate for fixed manufacturing costs is a predetermined rate based on a normal monthly production of 100,000 units. Production for April was 5,000 units in excess of sales, and the April ending inventory consisted of 8,000 units.

a. The vice president of marketing is not comfortable with the variable cost basis and wonders what income before tax would have been under absorption costing.

1.

Present the April income statement on an absorption costing basis.

2.

Reconcile and explain the difference between the variable costing and the absorption costing income figures.

b. Explain the features associated with variable cost income measurement that should be attractive to the vice president of marketing. (CMA adapted)

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CHARMING CURIOS Income Statement For the Month Ended April 30, 2000 ($000 omitted) Sales Variable standard cost of goods sold Product contribution margin Fixed expenses Manufacturing (at budget) Manufacturing spending variance Selling and administrative $4,800 (2,400) $2,400 $1,000 0 800 (1,800) $ 600 Income before taxes The controller attached the following notes to the statements: The unit sales price for April averaged $48. The standard unit manufacturing costs for the month were: Variable cost Fixed cost Total cost $24 10 $34