QUESTION A: Variable costing versus absorption costing

Timberline Company costs its production using standard costing. Operating income is reported using absorption costing. Variable manufacturing cost consists of direct material cost of $4.50 per unit and other variable manufacturing costs of $1.50 per unit. The standard production rate is 20 units per machine-hour. Total budgeted and actual fixed manufacturing overhead costs are $840,000. Fixed manufacturing overhead is allocated at $14 per machine-hour based on fixed manufacturing costs of $840,000 60,000 machine-hours, which is the level Timberline uses as its denominator level.

The selling price is $10 per unit. Variable operating (nonmanufacturing) cost, which is driven by units sold is $2 per unit. Fixed operating (nonmanufacturing) costs are $240,000. Beginning inventory is 2021 is 60,000 units; ending inventory is 80,000 units. Sales in 2021 are 1,080,000 units

The same standard unit costs persisted throughout 2020 and 2021. For simplicity, assume that there are no price, spending, or efficiency variances.

1.Prepare an operating statement for 2021 using absorption costing. Assume the production-volume variance is written off at year-end as an adjustment to cost of goods sold.

2.Prepare an operating statement for 2021 using variable costing.

3.Prepare a reconciliation of the differences in net income between the absorption and variable costing approaches.

4.Explain 2 methods that could be used to discourage overproduction with the purpose of maximizing operating income.

d.If the production volume variance is written off directly to cost of goods sold, what will be the cost per unit sold? What will be the cost per units in ending inventory? What concerns might you have with this arrangement and how should this be controlled?