Question

The Garvis Company uses an absorption-costing system based on standard costs. Variable manufacturing cost consists of direct material cost of $4.50 per unit and other variable manufacturing costs of $1.50 per unit. The standard production rate is 20 units per machine-hour. Total budgeted and actual fixed manufacturing overhead costs are $840,000. Fixed manufacturing overhead is allocated at $14 per machine-hour based on fixed manufacturing costs of $840,000 / 60,000 machine-hours, which is the level Garvis uses as its denominator level. The selling price is $10 per unit. Variable operating (non-manufacturing) cost, which is driven by units sold, is $2 per unit. Fixed operating (non-manufacturing) costs are $240,000. Beginning inventory in 2017 is 60,000 units; ending inventory is 80,000 units. Sales in 2017 are 1,080,000 units. The same standard unit costs persisted throughout 2016 and 2017. For simplicity, assume that there are no price, spending, or efficiency variances.

1.Required: income statement under throughput costing for the year ended December 31, 2017, for Garvis Company.

2.Reconcile the difference between the contribution margin and throughput margin for Garvis in 2017. Then reconcile the operating income between variable costing and throughput costing for Garvis in 2017.

3.Advocates of throughput costing say it provides managers less incentive to produce for inventory than either variable costing or, especially, absorption costing. Do you agree? Why or why not? Under what circumstances might you recommend that Garvis use throughput costing?

Answer 1

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