Question: Joan Keathley has been trying to convince her boss Jeff

Joan Keathley has been trying to convince her boss, Jeff Hamilton, to use variable costing for internal reporting purposes.
"If we could predict demand better, it wouldn't be an issue," argued Joan. Jeff doesn't think it is worth the extra effort or confusion of maintaining two sets of books. As a last resort, Joan has prepared income statements under five different scenarios of production volume.
She believes that if this doesn't convince Jeff that their current income statements have been misleading, nothing will.
The following table shows the inventory unit data under five scenarios. Each scenario should be considered independently.

Joan gathered the following information from the accounting records. Fixed manufacturing costs per unit were determined based on normal production of 700 units per year. The 200 units in beginning inventory are valued at $63.20.
Sales price per unit ............ $ 99.00
Variable manufacturing costs per unit....... $ 20.00
Fixed manufacturing costs per unit........ $ 43.20
Total fixed manufacturing costs........ $30,240
Total selling expense (all fixed) ......... $24,650

a. Complete the following table. Scenario A is completed for you as a guide.

b. How did unit sales change from one scenario to the next?
c. What causes the difference in income between variable and absorption costing?
d. The operating incomes for scenario C should be the same. Why?
e. Suppose Jeff Hamilton says he prefers the absorption costing statements because income increases from scenario to scenario. How would yourespond?
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  • CreatedFebruary 21, 2014
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