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    Variable versus absorption costing

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    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 construct Zwatch's 2004 income statement The foliowil.g da,a are fonhe year ended December 31,2004:

    Beginning inventory, January 1,2004____85,000 units
    Ending inventory, December 31, 2004____34,500 units
    2004 sales_____________________________345,400 units
    Selling price (to distributor)_________$22.00 per unit
    Variable manufacturing cost per unit,
    including direct materials_____________$5.10 per unit
    Variable oper. cost per unit sold______$1.10 per unit sold
    Fixed manufacturing overhead___________$1,44O,OOO
    Denominator-level machine-hours________6,000
    Standard production rate_______________50 units per machine-hour
    Fixed operating costs__________________$1,080,000

    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.

    Prepare income statements under variable costing for the year ended December 31, 2004. Show all work.

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    Solution Summary

    This question involves the fundamentals of Variable versus absorption costing