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Griswold Company began operations in 2013. The company manufacturers a professional-grade vacuum cleaner and can make up to 18,000 units each year. Actual data for 2013 are given as follows: Prepare a 2013 income statement for Griswold Company using variable costing. Prepare a 2013 income statement for Griswold Company using absorption costing. Explain the differences in operating incomes obtained in requirement 1 and requirement 2. Griswold’s management is considering implementing a bonus for the supervisors based on gross margin under absorption costing. What incentives will this create for the supervisors? What modifications could Griswold management make to improve such a plan? Explain briefly.
Expert Answer
1.
Sales = Number of goods sold × Selling price
= 17,500 × $425
= $7,437,500
Direct materials = 17,500 × $30 = $525,000
Direct manufacturing labor = 17,500 × $25 = $437,500
Marketing costs = 17,500 × $45 = $787,500
Manufacturing overhead = 17,500 × $60 = $1,050,000
| Griswold company | ||
| Income statement under variable costing | ||
| Particulars | Amount | Amount |
| Sales | $7,437,500 | |
| Less: Variable costs | ||
| Direct materials | $525,000 | |
| Direct manufacturing labor | $437,500 | |
| Marketing costs | $787,500 | |
| Manufacturing overhead | $1,050,000 | |
| Total variable costs | $2,800,000 | |
| Contribution | $4,637,500 | |
| Less: Fixed costs | ||
| Manufacturing costs | $1,080,000 | |
| Administrative costs | $965,450 | |
| Marketing | $1,366,400 | |
| Total fixed costs | $3,411,850 | |
| Net income | $1,225,650 | |
2.
Total fixed manufacturing costs incurred are $1,080,000
Total goods produced are 18,000 units
Manufacturing cost per unit = $1,080,000 ÷ 18,000 = $60
Calculate cost per unit:
| Direct materials | $30 |
| Direct manufacturing labor | $25 |
| Manufacturing overhead | $60 |
| Fixed manufacturing costs | $60 |
| Total cost per unit | $175 |
Cost of goods sold = Number of units sold × Total manufacturing cost per unit
= 17,500 × $175
= $3,062,500
| Griswold company | ||
| Income statement under absorption costing | ||
| Particulars | Amount | Amount |
| Sales | $7,437,500 | |
| Less: Cost of goods sold | $3,062,500 | |
| Gross margin | $4,375,000 | |
| Less: Variable marketing costs | $787,500 | |
| Less: Fixed marketing costs | $1,366,400 | |
| Less: Fixed administrative costs | $965,450 | |
| Total Expenses | $3,119,350 | |
| Net Income | $1,255,650 | |
3.
Income under variable costing method is $1,225,650
Income under absorption costing method is $1,255,650
Difference between operating income of two methods is $30,000
The difference is because in variable costing method entire amount fixed manufacturing costs are charged to income where as in absorption costing method proportionate fixed manufacturing costs basing on number of goods sold are charged to net income.
4.
Absorption costing gross margin is higher than the variable costing gross margin. So bonus to the supervisor given on variable costing gross margin is benefit to the management.
