The management accountant at Clarkson Company has prepared the following income
ID: 2413261 • Letter: T
Question
The management accountant at Clarkson Company has prepared the following income statement for March using variable costing:
Sales
$2,600,000
Variable production costs
1,300,000
Contribution Margin
1,300,000
Fixed production costs
688,000
Fixed selling and administrative costs
392,000
Operating income
$ 220,000
The accountant provided the following information along with the statement:
The unit sales price for March was $26
Production for March was 6,000 units in excess of sales
The inventory on the last day of March was 40,000 units
Fixed manufacturing costs are allocated to each unit at a predetermined rate based on normal monthly production of 86,000 units
Materiality of the volume variance is calculated as a percentage of COGS (i.e written off to COGS)
Required:
a) Prepare an income statement for March using absorption costing. (9 marks)
b) Reconcile the difference in income under absorption and variable costing and explain why the difference arises. (3 marks)
c) Which is a better method – absorption or variable costing – for evaluating management performance? Explain your recommendation. (4 marks)
Sales
$2,600,000
Variable production costs
1,300,000
Contribution Margin
1,300,000
Fixed production costs
688,000
Fixed selling and administrative costs
392,000
Operating income
$ 220,000
Explanation / Answer
a) Income Statement - Absorption Costing: Sales 2600000 Less: Manuf costs: Variable 1300000 Fixed 688000 Total Manuf costs 1988000 Less:CS Manuf cost -48000 6000*8 Net Manuf costs 1940000 Gross Profit 660000 Less: Admin & Sell costs: Fixed Sell & Adm costs 392000 Operating Income $268,000 b) reconciliation of difference of income under absorption and variable: $ Operating Income as per Variable costing 220000 Add: CS Fixed Manufacturing cost: 48000 Operating income as per Absorption costing 268000 c)Variable costing is the better method because it explains what is the return after variable costs All the fixed costs are dealt after the variable costs which varies according to quantum of production.
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