Absorption and Variable Costing Income Statements Exercise

Byrd Company is a manufacturer of small appliances for both residential and commercial use. The companys accounting and financial reporting system is primarily designed to meet external reporting requirements in accordance with generally accepted accounting principles. For inventory costing purposes, Byrd uses the absorption costing method in conjunction with a standard costing system. Relevant information on one of Byrds product lines is provided below for the last two years. The standard costs for this product have not changed since 20X5.

Unit Information	20X6	20X7
Beginning Inventory	900 units	1,400 units
Production (Units produced)	2,000 units	400 units
Sales	1,500 units	1,700 units
Normal activity level (and budgeted units of production)	2,000 units	2,000 units
Other Data
Standard (selling) price per unit sold	$100.00	$100.00
Standard prime costs (DM & DL) per unit produced	40.00	40.00
Standard variable overhead cost per unit produced	15.00	15.00
Variable marketing and administrative costs per unit sold	1.00	1.00
Total budgeted (and actual) fixed manufacturing costs	$10,000	$10,000
Total fixed marketing and administrative costs	3,000	3,000
Net unfavorable variance* pertaining to variable manufacturing costs * All variances are expensed in the period incurred	$1,000	$1,000

Currently, Byrd evaluates the performance of its product line managers and calculates bonuses on the basis of operating income computed on an absorption basis. It has been suggested that the use of variable costing for internal reporting purposes might more accurately reflect the performance of the product line managers.

Required:

Using the data provided above, prepare income statements for Byrd Companys operating income for 20X6 and 20X7 using

a) the absorption costing method, and

b) the variable costing method.