The S. T. Shire Company uses direct costing for internal management purposes and absorption costing for external reporting purposes. Thus, at the end of each year financial information must be converted from direct costing to absorption costing in order to satisfy external requirements.

At the end of 19X1 it was anticipated that sales would rise 20% the next year. Therefore, production was increased from 20,000 units to 24,000 units to meet this expected demand. However, economic conditions kept the sales level at 20,000 units for both years.

The following data pertain to 19X1 and 19X2: mki4

Required:
a Present the income statement based on direct costing for 19X2.
b Present the income statement based on absorption costing for 19X2.
c Explain the difference, if any, in the net income figures.

Transcribed Image Text:

Selling price per unit Sales (units) Beginning inventory (units) Production (units) Ending inventory (units) Unfavorable direct labor, direct materials, and variable factory overhead variances (total) STANDARD VARIABLE COSTS PER UNIT FOR 19X1 AND 19X2 Direct labor Direct materials. Variable factory overhead. 19X1 19X2 $30 $30 20,000 20,000 2,000 2,000 20,000 24,000 2,000 6,000 $5,000 $4,000 $ 7.50 4.50 3.00 $15.00 ANNUAL FIXED COSTS FOR 19X1 AND 19X2 (BUDGETED AND ACTUAL) Production Selling and administrative. $ 90,000 100,000 $190,000 The factory overhead rate under absorption costing is based upon practical plant capacity, which is 30,000 units per year. All variances and under- or overabsorbed factory overhead are taken to cost of goods sold. All taxes are to be ignored.