Workshop Marginal & Absorption Costing

Question 1

BigScreen Corporation manufactures and sells 50-inch television sets and uses standard costing. Actual data relating to January, February and March of 2012 are:

January February March

Unit date

Beginning inventory 0 300 300

Production 1,000 800 1,250

Sales 700 800 1,500

Variable costs

Manufacturing cost per unit produced $900 $900 $900

Operating (marketing) cost per unit sold $600 $600 $600

Fixed costs

Manufacturing costs $400,000 $400,000 $400,000

Operating (marketing) costs $140,000 $140,000 $140,000

The selling price per unit is $2,500. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 1,000 units. There are no price, efficiency or spending variances. Any production-volume variance (over or under absorbed) is written off to cost of goods sold in the month in which it occurs.

Required

i) Prepare income statements for BigScreen in January, February and March of 2012 under (i) marginal costing and (ii) absorption costing.

ii) Explain the difference in operating income for January, February and March under marginal costing and absorption costing.