It is the end of

20132013.

The

ThurgoodThurgood

Company began operations in January

2012

The company is so named because it has no variable costs. All its costs are fixed; they do not vary with output. The

ThurgoodThurgood

Company is located on the bank of a river and has its own hydroelectric plant to supply power, light, and heat. The company manufactures a synthetic fertilizer from air and river water and sells its product at a price that is not expected to change. It has a small staff of employees, all paid fixed annual salaries. The output of the plant can be increased or decreased by adjusting a few dials on a control panel. The following budgeted and actual data are for the operations of the

Thurgood

Company.

1.	Prepare income statements with one column for 2012, one column for 2013, and one column for the two years together using (a) variable costing and (b) absorption costing.
2.	What is the breakeven point under (a) variable costing and (b) absorption costing?
3.	What inventory costs would be carried in the balance sheet on December 31, 2012 and 2013 under each method?
4.	Assume that the performance of the top manager of the company is evaluated and rewarded largely on the basis of reported operating income. Which costing method would the managerprefer? Why?

ThurgoodThurgood

uses budgeted production as the denominator level and writes off anyproduction-volume variance to cost of goods sold.

	2012		2013 (a)
Sales	14,000	tons	14,000	tons
Production	28,000	tons	0	tons
Selling price	$25	per ton	$25	per ton
Costs (all fixed):
Manufacturing	$364,000		$364,000
Operating (nonmanufacturing)	$48,000		$48,000

(a) Management adopted the policy, effective January 1,

20132013,

of producing only as much product as needed to fill sales orders. During

20132013,

sales were the same as for

20122012

and were filled entirely from inventory at the start of

20132013.