Absorption and Variable Costing with Over$-$ and Underapplied Overhead

Flaherty, Inc., has just completed its first year of operations. The unit costs on a normal costing basis are as follows:

Manufacturing costs $($per unit$)$:

Direct materials $(3$ lbs$.$ @ $1\mathrm{.}35)$ $$4\mathrm{.}05$

Direct labor $(0\mathrm{.}4$ hr$.$ @ $15\mathrm{.}50)6\mathrm{.}20$

Variable overhead $(0\mathrm{.}4$ hr$.$ @ $4\mathrm{.}00)1\mathrm{.}60$

Fixed overhead $(0\mathrm{.}4$ hr$.$ @ $7\mathrm{.}00)2\mathrm{.}80$

Total $$14\mathrm{.}65$

Selling and administrative costs:

Variable $$1\mathrm{.}80$ per unit

Fixed $$215,000$

During the year, the company had the following activity:

Units produced $27,500$

Units sold $24,750$

Unit selling price $$37$

Direct labor hours worked $11,000$

Actual fixed overhead was $$13,600$ less than budgeted fixed overhead. Budgeted variable overhead was $$4,100$ less than the actual variable overhead. The company used an expected actual activity level of $11,000$ direct labor hours to compute the predetermined overhead rates. Any overhead variances are closed to Cost of Goods Sold.

Absorption costing $=$ $$14\mathrm{.}65$ per unit

Variable costing $=$ $$11\mathrm{.}85$ per unitPrepare a variable$-$costing income statement. Round your answers to the nearest cent.

Flaherty, Inc.

Variable$-$Costing Income Statement

For the First Year of Operations

$1$ Prepare an absorption$-$costing income statement

$2.$ Prepare a variable costing income statement.

$3.$ Reconcile the difference between the two income statements.