Question
The Zwatch Company manufactures trendy, high-quality moderately priced watches. As Zwatch's senior financial analyst, you are asked to recommend a method of inventory costing. The
The Zwatch Company manufactures trendy, high-quality moderately priced watches. As Zwatch's senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare Zwatch's 2014 income statement. The following data are for the year ended December 31,2014:
Beginning inventory, January 1, 2014
90,000 units
Ending inventory, December 31, 2014
32,000 units
2014 sales
350,000 units
Selling price (to distributor)
$25.00 per unit
Variable manufacturing cost per unit, including direct materials
$5.80 per unit
Variable operating (marketing) cost per unit sold
$1.70 per unit sold
Fixed manufacturing costs
$1,586,000
Denominator-level machine-hours
6,100
Standard production rate
50 units per machine-hour
Fixed operating (marketing) costs
$1,110,000
Assume standard costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume no price, spending, or efficiency variances. Any production-volume variance is written off to cost of goods sold in the month in which it occurs.
Requirements
1. | Prepare income statements under variable and absorption costing for the year ended December 31, 20142014. |
2. | What is ZwatchZwatch's operating income as percentage of revenues under each costing method? |
3. | Explain the difference in operating income between the two methods. |
4. | Which costing method would you recommend to the CFO? Why? |
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