In: Accounting
The
Ridgefield
Company manufactures trendy, high-quality moderately priced watches. As
Ridgefield's
senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare
Ridgefield's
2017
income statement. The following data are for the year ended December 31,
2017:
Beginning inventory, January 1, 2017
83,000 units
Ending inventory, December 31, 2017
34,500 units
2017 sales
424,000 units
Selling price (to distributor)
$23.50 per unit
Variable manufacturing cost per unit, including direct materials
$4.80 per unit
Variable operating (marketing) cost per unit sold
$1.30 per unit sold
Fixed manufacturing costs
$1,766,400
Denominator-level machine-hours
6,400
Standard production rate
60 units per machine-hour
Fixed operating (marketing) costs
$1,040,000
Assume standard costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume no price, spending, or efficiency variances. Any production-volume variance is written off to cost of goods sold in the month in which it occurs.
Requirements
1. |
Prepare income statements under variable and absorption costing
for the year ended December 31,
2017. |
2. |
What is
Ridgefield's operating income as percentage of revenues under each costing method? |
3. |
Explain the difference in operating income between the two methods. |
4. |
Which costing method would you recommend to the CFO? Why? |