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.

LOADING...

(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

LOADING...

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

U

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