When Waterways' management met to review the year-end financial statements, the room was filled with excitement. Sales had been exceptional during the year and every department had exceeded the budget and last year's sales totals. Several years ago Waterways had implemented a bonus system based on percentage of sales over budget, and the managers were expecting healthy cheques at the end of the year.
Yet the plant manager, Ryan Smith, was stunned into silence when he read the bottom line on the income statement for manufacturing operations. It was showing a loss! He immediately approached the CFO asking for an explanation. Ryan wondered, "Why did we go through all that trouble and inconvenience to adopt those cost-cutting measures when they had the opposite effect?" One of those measures was to move toward lean manufacturing.
The CFO retrieved the following information with respect to the top-selling line from the manufacturing operations for the last three years. Production on this line began on January 1, 2010.

Waterways uses the absorption costing method and accounts for inventory using FIFO.
Instructions
(a) Using the information provided, recreate Waterways' statements for this division using condensed, three-year comparative income statements. Explain why there is a loss in 2012 despite having record sales during the year.
(b) Using the information provided prepare condensed, three-year comparative income statements using the variable costing method. Reconcile the variable costing income with the absorption costing income calculated in part (a). State at least two advantages of variable costing.
(c) Assume that Waterways uses a normal costing method. The company had budgeted 80,000 units of production for each of the three years. Calculate the volume variance for each year indicating if it is favourable or un-favourable.
(d) Is Waterways a good candidate for adopting throughput costing? Explain.

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2010 2011 2012 Beginning inventory of finished units Production in units Sales in units 80,000 85,000 60,000 70,000 $25 $3 75,000 $25 $3 80,000 $27 $4 Selling price Direct material Direct labour Variable manufacturing overhead Variable selling and administration Fixed manufacturing overhead Fixed selling and administration 4 612,000 612,000 612,000 150,000 150,000 150,000