During its first year of operations, Sugarsmooth, Inc., produced 55,000 jars of hand cream based on a formula containing 10% glycolic acid. Unit sales were 53,500 jars. Fixed over¬

head was applied at $0.50 per unit produced. Fixed overhead was underapphed by $10,000.

This fixed overhead variance was closed to Cost of Goods Sold. There was no variable over¬

head variance. The results of the year's operations are as follows (on an absorption-costing basis):

Required:
1. Give the cost of the firm's ending inventory under absorption costing. What is the cost of the ending inventory under variable costing?
2. Prepare a variable-costing income statement. Reconcile the difference between the two income figures.

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Sales (53,500 units @ $8.50) $454,750 Less: Cost of goods sold 170,500 Gross margin $284,250 Less: Selling and administrative (all fixed) 120,000 Operating income $164,250