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Assume standard costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume no price, spending, or

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Assume standard costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume no price, spending, or efficiency variances. Any production-volume variance is written off to cost of goods sold in the month in which it occurs.

Requirements

1.

Prepare income statements under variable and absorption costing for the year ended December 31,

2017.

2.

What is

Montre's

operating income as percentage of revenues under each costing method?

3.

Explain the difference in operating income between the two methods.

4.

Which costing method would you recommend to the CFO? Why

Requirement 1. Prepare income statements under variable and absorption costing for the year ended December 31,

2017.

Begin by preparing the income statement under variable costing for the year ended December 31,

2017.

Complete the top half of the income statement first, then complete the bottom portion.

Variable costing

Now prepare the income statement under absorption costing for the year ended December 31,

2017.

Complete the top half of the income statement first, then complete the bottom portion. (Label any variances as favorable (F) or unfavorable (U).)

Absorption costing

Requirement 2. What is

Montre's

operating income as percentage of revenues under each costing method? (Round the percentages to the nearest tenth percent, X.X%.)

Operating income

as % of revenues

Variable costing

%

Absorption costing

%

Requirement 3. Explain the difference in operating income between the two methods.

Operating income using variable costing is

greater

less

than operating income using absorption costing. The main difference between variable costing and absorption costing is the way

in which fixed manufacturing costs are accounted for.

that variable manufacturing costs are computed.

that variable operating costs are computed.

the manufacturing variance is allocated.

Requirement 4. Which costing method would you recommend to the CFO? Why?

The

absorption

variable

costing method should be recommended as it considers

a portion of the operating costs used in the sale of units.

a portion of the operating costs used to produce units of output.

all the manufacturing resources used in the sale of units.

all the manufacturing resources used to produce units of output.

Beginning inventory, January 1, 2017 Ending inventory, December 31, 2017 2017 sales Selling price (to distributor) Variable manufacturing cost per unit, including direct materials Variable operating (marketing) cost per unit sold Fixed manufacturing costs Denominator-level machine-hours Standard production rate Fixed operating (marketing) costs 85,000 units 37,000 units 406,000 units $23.50 per unit $5.80 per unit $1.70 per unit sold $1,683.600 6.100 60 units per machine-hour $1,120,000

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