Question

Alta Products Ltd. has just created a new division to manufacture and sell DVD players. The facility is highly automated and thus has high monthly fixed costs, as shown in the following schedule of budgeted monthly costs. This schedule was prepared based on an expected monthly production volume of 2,000 units. Manufacturing costs Variable costs per unit Direct materials $  30 Direct labour 40 Variable overhead 10 Total fixed overhead 70,000 Selling and administrative costs Variable 6% of sales Fixed $50,000 During August 2020, the following activity was recorded: Units produced 2,000 Units sold 1,700 Selling price per unit $  175 Instructions

a. Prepare an income statement for the month ended August 31, 2020, under absorption costing. Net income $34,150

b. Prepare an income statement for the month ended August 31, 2020, under variable costing. Net income $23,650

c. Reconcile the absorption-costing and variable-costing income figures for the month.

d. Prepare an income statement for the month ended August 31, 2020, under throughput costing.

e. Reconcile the variable-costing income and throughput-costing income figures for the month.

f. What are some of the arguments in favour of using variable costing? What are some of the arguments in favour of using absorption costing?

Answer 1