In January 20X0, Lisbon 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 100,000 grass clippers. Financial results were as follows:
– Sales: 75,000 units at €18 – Direct labour at standard: 100,000 × €8 = €800,000 – Direct-labour variances: €34,000 U – Direct materials at standard: 100,000 × €5 = €500,000 – Direct-material variances: $9,500 U –Overhead incurred at standard: 100,000 × €4 = €400,000 –Overhead variances: €3,500 F Lisbon 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, and (b). Using method b. Assume no selling and administrative expenses.
2. Calculate ending inventory value (a) using method and (b) using method b. That there was no beginning inventory.
3. What is the major argument in support of each method?