The following information relates to Mucktar Ltd. during the first quarter of 2015:

Additional data:
a. On January 1, there were 2,000 units on hand.
b. Fixed overhead cost is $3.00 per unit and is applied to units of product on the basis of a production volume of 14,000 units per month. Costs of goods sold is adjusted for any overapplied or underapplied fixed manufacturing overhead.
c. Mucktar Ltd. uses FIFO inventory flow. Work in process inventories are not material and are to be ignored.
d. Fixed selling and administrative expenses total $22,000 per month.
Required:
1. Prepare quarterly income statements using
a. Absorption costing.
b. Variable costing.
2. Explain why, under absorption costing, monthly profits have moved erratically over the quarter and have not moved in correlation with changes in sales volume. Include a reconciliation of absorption and variable costing in your answer.
3. Identify the advantages and disadvantages of using variable costing for internal reporting purposes.

Transcribed Image Text:

January February 12000 March Unit sales. Sales price per unit.. Variable manufacturing cost per unit. Variable selling expense . Unit production .. 14,000 $12 5 2 18,000 18,000 $12 5 $12 5 2 15,000 13,000