Question: 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.
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?