Question 3

Mr. Livingstone is concerned about the inventories of bottled coconut water the company has been experiencing because of its limited shelf life. He suspects that it is related to bonus packages that the supervisors receive but is uncertain and does not know how to calculate it. The supervisors of Farm Management and the Processing Unit equally share a 2% bonus based on the income of Saddleback Farms every quarter and the company uses the absorption costing approach to financial statement preparation. He asks for your assistance.

To prepare answers for him, you collect the results of the Coconut water processing activity for the first quarter below.

Budgeted production 108,000 liter

Amount sold 90,000 liters

Selling price $20 per liter

Variable costs $12 per liter

Fixed costs $216,000

Required:Prepare the income statement under both absorption costing and variable costing to show to Mr. Livingstone the impact of each method on the bonus that the supervisors of the units would earn. What recommendation (if any) would you make to Mr. Livingstone?