Alta Products Ltd. has just created a new division to manufacture and sell DVD players. The facility is highly automated and thus has high monthly fixed costs, as shown in the following schedule of budgeted monthly costs. This schedule was prepared based on an expected monthly production volume of 2,000 units.

Prepare an income statement under variable costing, absorption costing, and throughput costing and reconcile the differences; discuss the usefulness of absorption costing versus variable costing.

Manufacturing costs

Variable costs per unit

Direct materials $ 30

Direct labour 40

Variable overhead 10

Total fixed overhead 70,000

Selling and administrative costs

Variable 6% of sales

Fixed $50,000

During August 2020, the following activity was recorded:

Units produced 2,000

Units sold 1,700

Selling price per unit $ 175

Instructions

a. Prepare an income statement for the month ended August 31, 2020, under absorption costing.

Net income $34,150

b. Prepare an income statement for the month ended August 31, 2020, under variable costing.

Net income $23,650

c. Reconcile the absorption-costing and variable-costing income figures for the month. d. Prepare an income statement for the month ended August 31, 2020, under throughput costing. e. Reconcile the variable-costing income and throughput-costing income figures for the month. f. What are some of the arguments in favour of using variable costing? What are some of the arguments in favour of using absorption costing?