Variable costing and absorption costing, the Z-Var Corporation. (R. Marple, adapted) It is the end of 2017. Z-Var Corporation began operations in January 2016. The company is so named because it has no variable costs (Zero VARiable). All its costs are fixed; they do not vary with output. Z-Var Corp. is located on the bank of a river and has its own hydroelectric plant to supply power, light, and heat. The company manufactures a synthetic fertilizer from air and river water and sells its product at a price that is not expected to change. It has a small staff of employees, all paid fixed annual salaries. The output of the plant can be increased or decreased by pressing a few buttons on a keyboard. The following budgeted and actual data are for the operations of Z-Var. The company uses budgeted production as the denominator level and writes off any production-volume variance to cost of goods sold.
2016 | 2017a | |
Sales | 30,000 tons | 30,000 tons |
Production | 60,000 tons | 0 tons |
Selling price | $ 90 per ton | $ 90 per ton |
Costs (all fixed): | ||
Manufacturing | $2,580,000 | $2,580,000 |
Operating (nonmanufacturing) | $ 102,000 | $ 102,000 |
- 1. Prepare income statements with one column for 2016, one column for 2017, and one column for the two years together using (a) variable costing and (b) absorption costing.
- 2. What is the breakeven point under (a) variable costing and (b) absorption costing?
- 3. What inventory costs would be carried in the balance sheet on December 31, 2016 and 2017 under each method?
- 4. Assume that the performance of the top manager of Z-Var is evaluated and rewarded largely on the basis of reported operating income. Which costing method would the manager prefer? Why?
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