Question
The Garrard Company manufactures trendy, high-quality, moderately priced watches. As Garrard's senior financial analyst, you are asked to recommend a method of inventory costing. The
The
Garrard
Company manufactures trendy, high-quality, moderately priced watches. As
Garrard's
senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare
Garrard's
2018
statement of comprehensive income. The following data are for the year ended December 31,
2018.
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(Click the icon to view the data.)
Assume standard costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume no price, rate, or efficiency variances. Any production-volume variance is written off to COGS in the month in which it occurs.
Required
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Requirement 1. Prepare statements of comprehensive income under variable and absorption costing for the year ended December 31,
2018.
Begin by preparing the statement of comprehensive income under variable costing for the year ended December 31,
2018.
Complete the top half of the statement of comprehensive income first, and then complete the bottom portion. (Complete all answer boxes. Use parentheses or a minus sign for an operating loss.)
Variable costing | ||||
Revenues | 5860000 | |||
Variable cost of goods sold: | ||||
Beginning inventory | 501600 | |||
Variable manufacturing costs | ||||
Cost of goods available for sale | 1863900 | |||
Deduct: | Ending inventory | 193800 | ||
Variable cost of goods sold |
| 1670100 | ||
Variable operating costs |
| 468800 | ||
Variable cost of goods sold | 2138900 |
Contribution margin |
| 3721100 | ||
Fixed operating costs |
| 2215600 | ||
Operating income (loss) |
Now prepare the statement of comprehensive income under absorption costing for the year ended December 31,
2018.
Complete the top half of the statement of comprehensive income first, and then complete the bottom portion. (Complete all answer boxes. Label any variances as favourable (F) or unfavourable (U). Use parentheses or a minus sign for an operating loss.)
Absorption costing | |||||||
Revenues | 5860000 | ||||||
Cost of goods sold: | |||||||
Beginning inventory | 106723 | ||||||
Variable manufacturing costs | 1362300 | ||||||
Allocated fixed manufacturing costs | 1123300 | ||||||
Cost of goods available for sale | 2592323 | ||||||
Deduct: | Ending inventory | 41234 | |||||
Adjustment for production-volume variance |
|
| |||||
Cost of goods sold |
|
| |||||
Gross margin |
|
Variable operating costs |
|
| |||
Fixed operating costs |
|
| |||
Operating income (loss) |
|
Requirement 2. What is
Garrard's
operating income as a percentage of revenues under each costing method? (Round the percentages to one decimal place, X.X%. Use parentheses or a minus sign for negative percentages.)
| 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, 2018
88,000
units
Ending inventory, December 31, 2018
34,000
units
2018 sales
293,000
units
Selling price (to distributor)
$20.00
per unit
Variable manufacturing cost per unit, including direct materials
$5.70
per unit
Variable operating (marketing) cost per unit sold
$1.60
per unit sold
Fixed manufacturing costs
$1,165,600
Denominator-level machine-hours
6,200
Standard production rate
40
units per machine-hour
Fixed operating (marketing) costs
$1,050,000
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