8-38 Variable Costing and Absorption Costing Income Statements; Reconciling Reported Operating Income (LO 8-2, 8-3, 8-4) Chataqua Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $30. The variable costs of production for one case of cans are as follows: Direct material Direct labor Variable manufacturing overhead Total variable manufacturing cost per case $ 8.00 2.50 7.50 $ 18.00 Variable selling and administrative costs amount to $0.40 per case. Budgeted fixed manufacturing overhead is $455,000 per year, and fixed selling and administrative cost is $46,000 per year. The following data pertain to the company's first three years of operation. Planned production (in units) Finished-goods inventory (in units), January 1 Year 1 91,000 Year 2 Year 3 91,000 91,000 0 0 28,500 Actual production (in units) 91,000 Sales (in units) 91,000 91,000 62,500 91,000 105,250 Finished-goods inventory (in units), December 31 0 28,500 14,250 Actual costs were the same as the budgeted costs. Required: 1. Prepare operating income statements for Chataqua Can Company for its first three years of operations using: a. Absorption costing. b. Variable costing. 2. Reconcile Chataqua Can Company's operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method. 3. Suppose that during Chataqua's fourth year of operation actual production equals planned production, actual costs are as expected, and the company ends the year with no inventory on hand. a. What will be the difference between absorption-costing income and variable-costing income in year 4? b. What will be the relationship between total operating income for the four-year period as reported under absorption and variable costing? Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 2 Req 3A Req 3B Prepare operating income statements for Chataqua Can Company for its first three years of operations using absorption costing. Sales revenue Year 1 Year 2 Year 3 $ 2,730,000 $ 1,875,000 $ 3,157,500 Less: Cost of goods sold Gross margin $ 2,093,000 637,000 $ 1,437,500 437,500 $ 2,420,750 736,750 Selling and Administrative Expenses Variable selling and administrative Fixed selling and administrative 36,400 25,000 46,000 46,000 42,100 46,000 Operating income $ 554,600 $ 366,500 $ 648,650 < Req 1A Req 1B > Req 1A Req 1B Req 2 Req 3A Req 3B Prepare operating income statements for Chataqua Can Company for its first three years of operations using variable costing. Sales revenue Variable expenses: Variable manufacturing costs Variable selling and administrative Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative Operating income A Year 1 Year 2 Year 3 0 $ 0 0 $ 0 $ 0 $ 0 < Req 1A Req 2 > Req 1A Req 1B Req 2 Req 3A Req 3B Reconcile Chataqua Can Company's operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method. Year 1 2 3 Change in inventory (in units) Difference in fixed Predetermined fixed overhead rate overhead expensed under absorption and variable costing < Req 1B Req 3A > Req 1A Req 1B Req 2 Req 3A Req 3B Suppose that during Chataqua's fourth year of operation actual production equals planned production, actual costs are as expected, and the company ends the year with no inventory on hand. What will be the difference between absorption-costing income and variable-costing income in year 4? Difference in reported income < Req 2 Req 3B > Req 1A Req 1B Req 2 Req 3A Req 3B Suppose that during Chataqua's fourth year of operation actual production equals planned production, actual costs are as expected, and the company ends the year with no inventory on hand. What will be the relationship between total operating income for the four-year period as reported under absorption and variable costing? Total operating income will be higher under variable costing. Total operating income will be higher under absorption costing. Total operating income will be same under absorption and variable costing. < Req 3A Req 3B >