The Gable Company manufactures trendy, high-quality moderately priced watches. As Gable’s senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare Gable’s2014income statement. The following data are for the year ended December 31,2014:
| Beginning inventory, January 1, 2014 | 89,000 | units |
| Ending inventory, December 31, 2014 | 34,000 | units |
| 2014 sales | 429,000 | units |
| Selling price (to distributor) | $23.00 | per unit |
| Variable manufacturing cost per unit, including direct materials | $5.60 | per unit |
| Variable operating (marketing) cost per unit sold | $1.80 | per unit sold |
| Fixed manufacturing costs | $1,996,800 | |
| Denominator-level machine-hours | 6,400 | |
| 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 in the month in which it occurs.
Requirements:
1) Prepare income statements under variable and absorption costing for the year ended December 31, 2014
2) What is Gable’s operating income as percentage of revenues under each costing method
3) Explain the difference in operating income between the two methods
4) Which costing method would you recommend to the CFO? Why?
