Question 1

Denominator levels and absorption/variable income statements R&R Industries manufactures mattresses that are made from celliant-infused fabric. The fabric has been proven to promote restful sleep and increased comfort. R and Rs management team is determining manufacturing budgets for 2020 and has set the following standard costs for each mattress:

Direct materials, $250.00

Direct manufacturing labour, $150.00

Variable manufacturing overhead, $ 85.00

Fixed annual manufacturing costs for the year are budgeted for $1,260,000.

Planned production for the year is 20,000 mattresses. At the end of 2020 it was determined that actual production for the year was 21,000 mattresses and 18,000 mattresses were sold. There were 1,000 mattresses in beginning inventory. Unsold mattresses at the end of 2020 were recorded on the balance sheet at standard cost. All actual product costs for 2020 were equal to standard costs determined at the beginning of the year. As such there are no price, efficiency, or rate variances. Any production volume variance is written off to the cost of goods sold for the year. Standard costs and application rates remained stable between 2019 and 2020. Variable selling and administrative expenses were $45.00 per mattress sold. Fixed selling and administrative expenses were $825,000 The selling price per mattress was $900.00 Required:

a. Prepare an income statement using absorption costing in the gross margin format.

b. Prepare an income statement using variable costing in the contribution margin format.

c. Provide the calculations (below) to reconcile the difference between the operating income calculated in part (a) and the operating income calculated in part (b) (3 marks)