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 2017 income statement. The following data are for the year ended December 31, 2017:

Beginning inventory, January 1, 2017 ................82,000 units Ending inventory, December 31, 2017................32,000 units 2017 sales...........................................................325,000 units Selling price (to distributor).................................$22.50 per unit Variable manufacturing cost per unit,

including direct materials.....................................$4.90 per unit Variable operating (marketing)

cost per unit sold..................................................$1.80 per unit sold Fixed manufacturing costs....................................$1,254,000 Denominator-level machine-hours........................5,700 Standard production rate.......................................50 units per machine-hour Fixed operating (marketing) costs..........................$1,050,000 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.

Requirement 1.

Prepare income statements under variable and absorption costing for the year ended December 31, 2017. Begin by preparing the income statement under variable costing for the year ended December 31, 2017. Complete the top half of the income statement first, then complete the bottom portion.

Variable Costing

Now prepare the income statement under absorption costing for the year ended December 31, 2017. Complete the top half of the income statement first, then complete the bottom portion.

Absorption Costing

Requirement 2

What is Zwatch's operating income as percentage of revenues under each costing method?

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 ___________(Options: greater, less) than operating income using absorption costing. The main difference between variable costing and absorption costing is the way ____________(Options: 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 __________(Options: absorption, variable) costing method should be recommended as it considers __________(Options: 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.)