James Walton, vice president of marketing for Charming Curios, has just received the April 2000 income statement

(Convert variable to absorption) James Walton, vice president of marketing for Charming Curios, has just received the April 2000 income statement, shown below, which was prepared on a variable costing basis. The firm uses a variable costing system for internal reporting purposes.




Variable standard cost of goods sold


Product contribution margin


Fixed expenses


Manufacturing (at budget)



Manufacturing spending variance



Selling and administrative



Income before taxes

$ 600

The controller attached the following notes to the statements:

The unit sales price for April averaged $48.

The standard unit manufacturing costs for the month were:

Variable cost


Fixed cost


Total cost


The unit rate for fixed manufacturing costs is a predetermined rate based on a normal monthly production of 100,000 units. Production for April was

5,000 units in excess of sales, and the April ending inventory consisted of 8,000 units.

a. The vice president of marketing is not comfortable with the variable cost

basis and wonders what income before tax would have been under absorption costing.

1. Present the April income statement on an absorption costing basis.

2. Reconcile and explain the difference between the variable costing and the absorption costing income figures


b. Explain the features associated with variable cost income measurement that should be attractive to the vice president of marketing. (CMA adapted)

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