Electricswitch is a division of Cunningham Products Corporation. The division ma

Question

Electricswitch is a division of Cunningham Products Corporation. The division manufactures and sells an electric switch used in a wide variety of applications. During the coming year it expects to sell 200,000 units for $8 per unit. Mel Torme is the division manager. He is considering producing either 200,000 or 250,000 units during the period. Other information is presented in the schedule. Prepare absorption and variable costing income statements and reconcile differences between absorption and variable costing income statements when sales level and production level change. Discuss relative usefulness of absorption costing versus variable costing. Prepare an absorption costing income statement, with one column showing the results if 200,000 units are produced and one column showing the results if 250,000 units are produced. Prepare a variable costing income statement, with one column showing the results if 200,000 units are produced and one column showing the results if 250,000 units are produced. Reconcile the difference in net incomes under the two approaches and explain what accounts for this difference.

Explanation / Answer

(a) Absorption Costing Income Statement:

Less: Cost of Goods sold:

(b) Variable Costing income statement:

(c) There is no difference in the Net Operating income as the number of units produced are sold away. If there exists a difference in quatity produced and sold then there do have difference in Net Operating income in both approaches because of the closing stock valuation - at absorption costing the total costs are considered to value and at variable costing only variable costs are considered to value the closing stock.

Production level 200000 units 250000 units Sales revenue $1,600,000 2,000,000

Less: Cost of Goods sold:

$1,100,000 1,250,000 Gross margin $ 500,000 $750,000 Less: Selling and administrative expenses $112000 $137000 Net Operating Income $388,000 $613,000

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