Chapter 9, Problem 9.25E

Variable versus absorption costing. The Tomlinson Company manufactures trendy, high-quality, moderately priced watches. As Tomlinson’s senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare Tomlinson’s 2017 income statement. The following data are for the year ended December 31, 2017:

Beginning inventory, January 1, 2017	90,000 units
Ending inventory, December 31, 2017	34,000 units
2017 sales	433,000 units
Selling price (to distributor)	$24.00 per unit
Variable manufacturing cost per unit, including direct materials	$5.40 per unit
Variable operating (marketing) cost per unit sold	$1.20 per unit sold
Fixed manufacturing costs	$1,852,200
Denominator-level machine-hours	6,300
Standard production rate	60 units per machine-hour
Fixed operating (marketing) costs	$1,130,000

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. Any production-volume variance is written off to cost of goods sold.

Required

1. 1. Prepare income statements under variable and absorption costing for the year ended December 31, 2017.
2. 2. What is Tomlinson’s operating income as percentage of revenues under each costing method?
3. 3. Explain the difference in operating income between the two methods.
4. 4. Which costing method would you recommend to the CFO? Why?