Charlene Ltd manufactures and sells laptops and uses standard costing. For the month of December there was no beginning inventory, there were 2,800 units produced and 2,400 units sold. The manufacturing variable cost per unit is $385 and the variable operating cost per unit is $312.50. The actual and fixed manufacturing cost is $250,000 and the fixed operating cost is $75,000. The selling price per unit is $925. The budgeted units to be produced are 2,750. There are no price, efficiency, or spending variances. Any production- volume variance is written off to cost of goods sold in the month in which it occurs. When calculating the budgeted overhead rate for fixed costs round to the nearest cent.

Required:

a. Prepare the income statement for Charlene Limited for December under absorption costing and variable costing. (9 marks)

b. Explain the difference between the variable and absorption costing methods. (1 mark)

c. Which method(s) are required for external reporting? For internal reporting? (1 mark)

d. Reconcile the difference in operating income calculated using variable costing and absorption costing. Then explain why there is a difference in the operating profit under the two methods. (3 marks)

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