InsertPage LayoutFormulasDataReviewHomeViewB.Gammaro CompanyIncome Statements for the Year Ended December 31, 201723VariableAbsorptionCosting$9,350,0005,855,000Costing$9,350,0004,695,0005 Revenues6 Cost of goods sold (at standard costs)7 Fixed manufacturing overhead (budgeted)8 Fixed manufacturing overhead variances (all unfavorable):9 Spending10 Production volume11 Total marketing and administrative costs (all fixed)12 Total costs13 Operating income1,350,000125,000125,000405,0001,570,0001,570,0007,740,000$1,610,0007,955,000$1,395,0001415 Inventories (at standard costs)16 December 31, 201617 December 31, 2017$1,730,000215,000$1,345,00045,000Required1. At what percentage of denominator level was the plant operating during 2017?2. How much fixed manufacturing overhead was included in the 2016 and the 2017 ending inventory underabsorption costing?3. Reconcile and explain the difference in 2017 operating incomes under variable and absorption costing.4. Tim Sweeney is concerned: He notes that despite an increase in sales over 2016, 2017 operating incomehas actually declined under absorption costing. Explain how this occurred.

Question
Asked Jan 14, 2020
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Comparison of variable costing and absorption costing. Gammaro Company uses standard costing. Tim Sweeney, the new president of Gammaro Company, is presented with the following data for 2017:

Insert
Page Layout
Formulas
Data
Review
Home
View
B.
Gammaro Company
Income Statements for the Year Ended December 31, 2017
2
3
Variable
Absorption
Costing
$9,350,000
5,855,000
Costing
$9,350,000
4,695,000
5 Revenues
6 Cost of goods sold (at standard costs)
7 Fixed manufacturing overhead (budgeted)
8 Fixed manufacturing overhead variances (all unfavorable):
9 Spending
10 Production volume
11 Total marketing and administrative costs (all fixed)
12 Total costs
13 Operating income
1,350,000
125,000
125,000
405,000
1,570,000
1,570,000
7,740,000
$1,610,000
7,955,000
$1,395,000
14
15 Inventories (at standard costs)
16 December 31, 2016
17 December 31, 2017
$1,730,000
215,000
$1,345,000
45,000
Required
1. At what percentage of denominator level was the plant operating during 2017?
2. How much fixed manufacturing overhead was included in the 2016 and the 2017 ending inventory under
absorption costing?
3. Reconcile and explain the difference in 2017 operating incomes under variable and absorption costing.
4. Tim Sweeney is concerned: He notes that despite an increase in sales over 2016, 2017 operating income
has actually declined under absorption costing. Explain how this occurred.
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Insert Page Layout Formulas Data Review Home View B. Gammaro Company Income Statements for the Year Ended December 31, 2017 2 3 Variable Absorption Costing $9,350,000 5,855,000 Costing $9,350,000 4,695,000 5 Revenues 6 Cost of goods sold (at standard costs) 7 Fixed manufacturing overhead (budgeted) 8 Fixed manufacturing overhead variances (all unfavorable): 9 Spending 10 Production volume 11 Total marketing and administrative costs (all fixed) 12 Total costs 13 Operating income 1,350,000 125,000 125,000 405,000 1,570,000 1,570,000 7,740,000 $1,610,000 7,955,000 $1,395,000 14 15 Inventories (at standard costs) 16 December 31, 2016 17 December 31, 2017 $1,730,000 215,000 $1,345,000 45,000 Required 1. At what percentage of denominator level was the plant operating during 2017? 2. How much fixed manufacturing overhead was included in the 2016 and the 2017 ending inventory under absorption costing? 3. Reconcile and explain the difference in 2017 operating incomes under variable and absorption costing. 4. Tim Sweeney is concerned: He notes that despite an increase in sales over 2016, 2017 operating income has actually declined under absorption costing. Explain how this occurred.

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