Prepare an income statement for using absorption costing

Reference no: EM132218674

Question - VARIABLE AND ABSORPTION COSTING

Benches on High began operations at the beginning of 2014. This company produces and sells granite and marble bench tops, designed and customised to individual kitchen specifications. Rob Stone, the owner, is very happy with his overall profitability, but is confused about some of the numbers. He is curious as to why, when he sold exactly twice as many bench tops in 2015 as he did in 2014, his reported annual profit is not exactly twice what it was in 2014 (2014: $173,000). The company uses a standard costing system, and fixed manufacturing overheads are allocated according to the number of units produced in 2014. There are no price, efficiency or spending variances in 2015. All variances are written off to Cost of Goods Sold in the year in which they occur. Actual data are provided in Exhibit 4. Exhibit 4 Actual Data for 2014 and 2015 Sales Price (average) $ 1,000 per unit sold Variable manufacturing costs 100 per unit produced Variable marketing costs 150 per unit sold Fixed manufacturing costs 20,000 Fixed administrative costs 40,000 2014 2015 Units produced 500 400 Units sold 300 600

Required:

(a) Prepare an Income Statement for 2015 using absorption costing.

(b) Prepare an Income Statement for 2015 using variable (direct) costing.

(c) Write a brief comment to Mr Patz, explaining why the profit for 2015 was not twice that of 2014. Include a numerical analysis to justify your explanation.

Reference no: EM132218674

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