Victory Manufacturing Company (Victory) manufactures and sells a product A. The company adopts absorption-costing system based on standard costs. 

 

The following are actual data for the month of April 2020: 

5,000 units of Product A were sold at a selling price of $900 per unit. 

Fixed manufacturing overheads incurred were $480,000 

Variable marketing cost was $4 per unit sold. 

General and administration overhead (all fixed) were $150,000. 

Beginning inventory was 200 units and ending inventory was 350 units 

There was no price, spending, or efficiency variances. The company writes off production volume variance to cost of goods sold. 

Required: 

a) Prepare the April 2020 income statement for Product A using absorption costing (5 marks) 

b) Prepare the April 2020 income statement for Product A using variable costing 

c) Reconcile and explain the operating incomes under absorption costing and variable costing as calculated in requirement (a) and (6) above. 

d) Chen Yi, the product manager of Product A, is under pressure to boost the performance of the product line in 2020. Unfortunately, following a market downturn, the profits in coming months are expected to be deteriorating. What do you think Chen Yi might do in this situation if his only focus is to protect his incentive bonus which is based on Product A's profits? 

Name three examples of dysfunctional decisions he may make if his performance is evaluated under the absorption costing operating income

Transcribed Image Text:

Variable manufacturing cost: Direct materials cost Other variable manufacturing cost Standard production rate Budgeted fixed manufacturing overhead per month Budgeted available capacity per month $600 per unit $40 per unit 20 units per machine-hour $480,000 300 machine-hours Variable manufacturing cost: Direct materials cost Other variable manufacturing cost Standard production rate Budgeted fixed manufacturing overhead per month Budgeted available capacity per month $600 per unit $40 per unit 20 units per machine-hour $480,000 300 machine-hours

Answer rating: 100% (QA)

INCOME STATEMENT USING ABSORPTION COSTING d Beginning InventoryUnits Ending InventoryUnits Increase ... View the full answer