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Cost Accounting for Beginning Inventory

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Consider the following information:

Q1 Q2 Q3
Beginning inventory (units) 0 300 300
Actual units produced 1,000 800 1,250
Budgeted units to be produced 1,000 1,000 1,000
Units sold 700 800 1,500
Manufacturing costs per unit produced $900 $900 $900
Marketing costs per unit sold $600 $600 $600
Fixed manufacturing costs $400,000 $400,000 $400,000
Fixed marketing costs $140,000 $140,000 $140,000
Selling price per unit $2,500 $2,500 $2,500

There are no price, efficiency, or spending variances, and any production-volume variance is directly written off to cost of goods in the quarter in which it occurs.

a) Prepare income statements for Q1, Q2, and Q3 using variable costing and absorption costing.
b) Explain the differences in operating income between the two costing systems for each quarter. Be specific!

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The cost accounting for beginning inventory is discussed.

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