Costing methods and variances, comprehensive

Rob Kapito, the controller of Blackstar Paint Supply Company, has been exploring a variety of internal accounting systems. Rob hopes to get the input of Blackstar's board of directors in choosing one. To prepare for his presentation to the board, Rob applies four different cost accounting methods to the firm's operating data for 2013. The four methods are actual absorption costing, normal absorption costing, standard absorption costing, and standard variable costing.
With the help of a junior accountant, Rob prepares the following alternative income statements:

Where applicable, Rob allocates both fixed and variable manufacturing overhead using direct labor hours as the driver. Blackstar carries no work-in-process inventory. Standard costs have been stable over time, and Rob writes off all variances to cost of goods sold. For 2013, there was no flexible budget variance for fixed overhead. In addition, the direct labor variance represents a price variance.

Required:
1. Match each method below with the appropriate income statement (A, B, C, or D):

2. During 2013, how did Blackstar's level of finished goods inventory change? In other words, is it possible to know whether Blackstar's finished goods inventory increased, decreased, or stayed constant during the year?
3. From the four income statements, can you determine how the actual volume of production during the year compared to the denominator (expected) volume level?
4. Did Blackstar have a favorable or unfavorable variable overhead spending variance during 2013?

1. Actual Absorption costing C
Normal Absorption costing D
Standard Absorption costing A
Standard Variable costing B

Statement C, with no variances, is clearly actual costing. Statement D, which contains variances for overhead but not for direct materials and direct labor, must be normal costing. Finally, A has a higher figure for Cost of Goods Sold and so must represent standard absorption costing (where fixed manufacturing overhead is also treated as a product cost), while B is standard variable costing.

2. The net income under standard variable costing (B; $155,000) exceeds that under standard absorption costing (A; $130,000). Because there are no work-in-process inventories, this reflects a higher level of fixed overhead expensed from opening inventory under absorption costing than the amount trapped in ending inventory. With stable standard costs, this implies that the level of finished goods inventory has decreased in 2013.

3. From statement B, the aggregate variance for variable overhead is zero. So, the $25,000 variance for total overhead in A must all be for fixed overhead. We are told that there is no flexible budget variance for fixed overhead. The $25,000 variance in statement A (standard absorption costing) must therefore be the production volume variance. As it is added to cost of goods sold, the variance is unfavorable. This implies that fixed manufacturing overhead costs were underapplied, or that fewer units were produced than the denominator (expected) level.

4. The aggregate variable overhead variance of zero is the sum of the spending and efficiency variances. Note that variable overhead is applied using direct labor hours as the driver. We are told that there is no direct labor efficiency variance (because the direct labor variance is a price variance), which implies that the variable overhead efficiency variance is also zero. Therefore, the variable overhead spending variance must also be zero, i.e., it is neither favorable nor unfavorable.