1. a. The unit product cost under absorption costing is:

		Direct materials...................................
		Direct labor.........................................
		Variable manufacturing overhead........
		Fixed manufacturing overhead
		Absorption costing unit product cost....

b. The absorption costing income statement is:

		Sales (8,000 units $75 per unit)...........................
		Cost of goods sold ..................................................
		Gross margin...........................................................
		Selling and administrative expenses.........................
		Net operating income...............................................

2. a. The unit product cost under variable costing is:

		Direct materials..............................
		Direct labor....................................
		Variable manufacturing overhead...
		Variable costing unit product cost...

b. The variable costing income statement is:

		Sales (8,000 units $75 per unit)...................
		Variable expenses:
		Variable cost of goods sold ...........................
		Variable selling expenses (8,000 units $6 per unit).........................
		Contribution margin.........................................
		Fixed expenses:
		Fixed manufacturing overhead......................
		Fixed selling and administrative expenses.....
		Net operating income.......................................		$ 12,000

3. The difference in the ending inventory relates to a difference in the handling of fixed manufacturing overhead costs. Under variable costing, these costs have been expensed in full as period costs. Under absorption costing, these costs have been added to units of product at the rate of $10 per unit ($100,000 10,000 units produced = $10 per unit). Thus, under absorption costing a portion of the $100,000 fixed manufacturing overhead cost for the month has been added to the inventory account rather than expensed on the income statement:

	Added to the ending inventory (2,000 units $10 per unit)........................................	$20,000
	Expensed as part of cost of goods sold (8,000 units $10 per unit)........................................	80,000
	Total fixed manufacturing overhead cost for the month..	$100,000

Because $20,000 of fixed manufacturing overhead cost has been deferred in inventory under absorption costing, the net operating income reported under that costing method is $20,000 (= $32,000 $12,000) higher than the net operating income under variable costing, as shown in parts (1) and (2) above.

PROBLEM 6-20 Variable and Absorption Costing Unit Product Costs and Income Statements; Explana- tion of Difference in Net Operating Income LO6-1, LO6-2, L06-3 High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant's operation: o 10,000 8,000 $75 Beginning inventory ... Units produced Units sold. Selling price per unit.... Selling and administrative expenses: Variable per unit ....... Fixed (per month).... Manufacturing costs: Direct materials cost per unit ....... Direct labor cost per unit ... Variable manufacturing overhead cost per unit ...... Fixed manufacturing overhead cost (per month)....... .. $6 $200,000 $20 $8 $2 $100,000 Management is anxious to assess the profitability of the new camp cot during the month of May. Required: 1. Assume that the company uses absorption costing. a. Determine the unit product cost. b. Prepare an income statement for May. Assume that the company uses variable costing. a. Determine the unit product cost. b. Prepare a contribution format income statement for May. Explain the reason for any difference in the ending inventory balances under the two costing methods and the impact of this difference on reported net operating income. 3. EX