Comparison of Absorption and Variable Costing. Randolph Frame Factory has just completed its first three years of operation. Amy Randolph, president, has reviewed the audited financial statements for those three years and compared them to the statements her chief accountant prepared for internal use. She questions why the two sets of financial statements have different net income numbers. When asked about this, the chief accountant responded that the audited statements were prepared using absorption costing and the internal statements using variable costing. Amy still didn't understand why differences in net income would appear. She wants an analysis of the two results.

The selling price and cost data are identical for each of the three years and appear as follows:

The company uses a FIFO cost flow.
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1. Prepare a three-year comparative income statement using absorption costing.
2. Prepare a three-year comparative income statement using variable costing.
3. Reconcile the net income figures of absorption costing and variable costing for each of the three years.
4. Using a graph with sales units on the horizontal axis and net income (dollars) on the vertical axis, plot and connect the following points:

(a) Net income and sales units assuming absorption costing.

(b) Net income and sales units assuming variable costing.

(c) The difference in net income between the two costing methods and their related sales units.
5. What conclusions can you derive from the graph in Part (4) about the advantages of the variable costing approach?

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Selling price per unit Manufacturing costs: Direct materials cost per unit Direct labor cost per unit Variable factory overhead per unit Fixed factory overhead in total... Marketing and administrative expenses: Variable ... Fixed Year 1997 1998 1999 $15.00 $2.80 4.70 .50 $120,000.00 25% of sales $ 35,000 Units Production Sales 60,000 50,000 60,000 55,000 50,000 60,000