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Variable and Absorption Costing

Prepare income statements under variable and absorption costing for the year ended December 31, 2007. - see attachment

Jennifer Bruner
Cost Accounting
December 21, 2008

Variable versus Absorption Costing

Introduction:
The Zwatch Company manufactures trendy, high-quality, moderately priced watches. As Zwatch's senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare Zwatch's 2007 income statement.

Beginning inventory, January 1, 2007 85,000 units
Ending inventory, December 31, 2007 34,500 units
2007 sales 345,400 units
Selling price (to distributor) $22 per unit
Variable manufacturing cost per unit, including direct materials $5.10 per unit
Variable operating cost per unit sold $1.10 per unit sold
Fixed manufacturing costs 1,440,000
Denominator-level machine hours 6,000
Standard production rate 50 units per machine-hours
Fixed operating costs $1,080,000

Assume standard costs per unit are the same for units in the beginning inventory and units produced during the year. In addition, assume no price, spending, or efficiency variances. Any production volume-variance is written off to cost of goods sold in the month when it occurs.

Task(s):
 Prepare income statements under variable and absorption costing for the year ended December 31, 2007.

Deliverables and format:
Microsoft Excel document, showing all calculations

Attachments

Solution Summary

The solution explains how to prepare an income statement using variable costing and absorption costing

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