2 Absorption versus variable costing. Grunewald Company manufacturers a professi

Question

2 Absorption versus variable costing. Grunewald Company manufacturers a professional grade vacuum cleaner and began operations in 2011. For 2011, Grunewald budgeted to produce and sell 20,000 units. The company had no price, spending, or efficiency variances, and writes off production-volume variance to cost of goods sold. Actual data for 2011 are given as follows:

Units produced 18,000

Units sold 17,500

Selling price $425

Variable costs:

Manufacturing cost per unit produced

Direct materials $30

Direct manufacturing labor 25

Manufacturing overhead 60

Marketing cost per unit sold 45

Fixed costs:

Manufacturing costs 1,100,000

Administrative costs 965,450

Marketing 1,366,400

1.Prepare a 2011 income statement for Grunewald Company using variable costing

.2.Prepare a 2011 income statement for Grunewald Company using absorption costing.

3.Explain the differences in operating incomes obtained in requirement 1 and 2.

4.Grunewald's management is considering implementing a bonus for the supervisorsbased upon gross margin under absorption costing.What incentives will thiscreate for the supervisors?What modifications could Grunewald management make toimprove such a plan?Explain briefly.

Explanation / Answer

Incentive would be higher margin in absorption costing this will inflate his bonus, management should consider to adopt variable costing.

Income Statement(Variable Costing) Particulars Units sold Rate Amount Selling Price 17500 $              425 $        7,437,500 Variable costs: Direct materials 17500 $ 30 Direct manufacturing labor 17500 $ 25 Manufacturing overhead 17500 $ 60 Marketing cost per unit sold 17500 $ 45 Contribution 17500 $ 265 $        4,637,500 Less: Fixed Cost Manufacturing costs $        1,100,000 Administrative costs $           965,450 Marketing $        1,366,400 Net Operating Income $        1,205,650 Income Statement(Absorption Costing) Particulars Amount Sales $        7,437,500 Less: COGS Cost of goods manufactured $ 3,170,000 Closing inventory (170*500) $        85,000 $        3,085,000 Gross Profit $        4,352,500 Less: Marketing & administrative expenses Variable expenses 17500 $ 45 $           787,500 Fixed Expense: Administrative costs $ 965,450 Marketing $ 1,366,400 $        2,331,850 Net Operating Income $        1,233,150 Difference 27500 is due to passage of fixed cost to closing inventory (55*500 = 27500) (1100000 / 20000 = 55) 30+25+60+55 = 170

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