In January 20X0, Georgia Garden Equipment Company started a division for making grass clippers. Management hoped that these grass clippers were significantly better than most competitors in the market. During 20X0, it produced 97,500 grass clippers. Financial results were as follows:
● Sales: 78,000 units at $20
● Direct labor at standard: 97,500 * $9 = $877,500
● Direct-labor variances: $33,000 U
● Direct materials at standard: 97,500 * $4 = $390,000
● Direct-material variances: $11,500 U
● Overhead incurred at standard: 97,500 * $2 = $195,000
● Overhead variances: $2,500 F
Georgia uses an absorption-costing system and allows divisions to choose one of two methods of accounting for variances:
a. Direct charge to income
b. Proration to the production of the period; method b requires variances to be spread equally over the units produced during the period
1. Calculate the division’s operating income (a) using method a and (b) using method b. Assume no selling and administrative expenses.
2. Calculate ending inventory value (a) using method a and (b) using method b. Note that there was no beginning inventory.
3. What is the major argument in support of each method?

  • CreatedNovember 19, 2014
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