P8.39B

Prepare absorption and variable-costing income statements; reconcile the differences between

the two income statements when sales and production levels change; discuss the usefulness of the

two approaches to costing.

(LO 1, 2, 3) Harrison Pumps is a division of Liverpool Controls Corporation. The division

manufactures and sells a pump that is used in a wide variety of applications. During the coming

year, it expects to sell 60,000 units for $30 per unit. Imran Qureshi manages the division. He is

considering producing either 60,000 or 90,000 units during the period. Other information is as

follows:

17

Division Information for 2020

Beginning inventory 0

Expected sales in units 60,000

Selling price per unit $30

Variable manufacturing cost per unit $12

Fixed manufacturing overhead cost (total) $540,000

Fixed manufacturing overhead costs per unit

Based on 60,000 units $9 per unit ($540,000 60,000)

Based on 90,000 units $6 per unit ($540,000 90,000)

Manufacturing cost per unit

Based on 60,000 units $21 per unit ($12 variable + $9 fixed)

Based on 90,000 units $18 per unit ($12 variable + $6 fixed)

Variable selling and administrative expenses $2 per unit

Fixed selling and administrative expenses (total) $50,000

Instructions

a.

Prepare an absorption-costing income statement, with one column showing the results if 60,000

units are produced and one column showing the results if 90,000 units are produced.

90,000 units:

NI $550,000

b.

Prepare a variable-costing income statement, with one column showing the results if 60,000 units

are produced and one column showing the results if 90,000 units are produced.

90,000 units:

NI $370,000

c.

Reconcile the difference in net incomes under the two approaches and explain what causes this

difference.

d.

Discuss the usefulness of variable-costing income statements versus the absorption-costing

income statements for decision-making and for evaluating the manager's performance.