Curtis Laboratories is a relatively small company that produces widgets that started operations only a few years ago. The owner is considering expanding operations and has even considered introducing a certain amount of automation. Unfortunately, the owner of Curtis Laboratories is not very knowledgeable about cost management. Production data for Curtis for Year 1 and Year 2 is as follows:

Year 1 Year 2

Sales $200,000 $220,000

Variable Production Costs 30,000 35,000

Fixed Production Costs 40,000 45,000

Variable SG&A Expenses 25,000 30,000

Fixed SG&A Expenses 20,000 22,000

Beginning Finished Goods Inventory 15,000 (AC) 35,000 (AC)

Ending Finished Goods Inventory 35,000 (AC) 40,000 (AC)

25,000 (VC) 35,000 (VC)

Questions

If Curtis adopts absorption costing (AC), which costs are product costs and which costs are period costs? If Curtis adopts variable costing (VC), which costs are product costs and which costs are period costs?

If Curtis adopts absorption costing, what is the operating income for Year 1 and Year 2?

If Curtis adopts variable costing, what is the operating income for Year 1 and Year 2?