Alta Products Ltd. has just created a new division to manufacture and sell DVD players. The facility is highly automated and thus has high monthly fixed costs, as shown in the following schedule of budgeted monthly costs. This schedule was prepared based on an expected monthly production volume of 2,000 units.
Manufacturing costs
Variable costs per unit
Direct materials ...................................................................... $ 30
Direct labour ............................................................................ 40
Variable overhead ...................................................................... 10
Total fixed overhead ............................................................. 70,000
Selling and administrative costs
Variable 6% of sales
Fixed ............................................................................ $ 50,000
During August 2012, the following activity was recorded:
Units produced ...................................................................... 2,000
Units sold ............................................................................. 1,700
Selling price per unit ................................................................ $ 175
Instructions
(a) Prepare an income statement for the month ended August 31, 2012, under absorption costing.
(b) Prepare an income statement for the month ended August 31, 2012, under variable costing.
(c) Reconcile the absorption costing and variable costing income figures for the month.
(d) Prepare an income statement for the month ended August 31, 2012, under throughput costing.
(e) Reconcile the variable-costing income and throughput-costing income figures for the month.
(f) What are some of the arguments in favour of using variable costing? What are some of the arguments in favour of using absorption costing?