Question

Ting Ho Company began operations in January 20×2. All its costsare fixed; they do not vary with output.

Ting Ho Company is located in Science Park and has its ownhydroelectric plant to supply power, light, and heat. The companymanufactures a synthetic energy bar from air and river water andsells its product at a price that is not expected to change. It hasa small staff of employees, all paid fixed annual salaries. Theoutput of the plant can be increased or decreased by adjusting afew dials on a control panel.

The following budgeted and actual data are for the operations ofTing Ho Company. Ting Ho uses budgeted production as thedenominator level and writes off any production-volume variance tocost of goods sold.

20×2 20×3

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Sales 10,000 tons 10,000 tons

Production 20,000 tons 0 tons

Selling price $25 per ton $25 per ton

Costs (all fixed):

Manufacturing $380,000 $380,000

Operating $35,000 $35,000

Required:

a) Prepare income statements with one column for 20×2, onecolumn for 20×3, and one column for the two years together, using(a) variable costing and (b) absorption costing assuming adenominator level of 10,000 tons.

b) Determine the inventory costs that would be carried in thebalance sheet on 31 December 20×2 and 20×3, under each method.

c) Assume that the performance of the top manager of the companyis evaluated and rewarded largely on the basis of reportedoperating income. Which costing method would the manager prefer?Explain.