Example Variable vs. Full Absorption Costing

A company that uses a FIFO inventory system and began operations in Year 1 has the following information.

Year 1 Year 2

Sales units 8,000 10,000

Selling price $45 $46

Production units 12,000 8,000

Unit direct material cost $2.00 $2.00

Unit direct labor cost $1.00 $1.00

Unit commission cost $.50 $.50

Annual Fixed Overhead $180,000 $180,000

Annual Fixed S,G,&A $140,000 $150,000

1. What are the inventoriable cost per unit in years 1 and 2?

Absorption Costing Variable Costing

2. What would the income statements look like?

Absorption Costing Variable Costing