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. @ 1.40) $4.20

Direct labor (0.4 hr. @ 15.00) 6.00

Variable overhead (0.4 hr. @ 4.00) 1.60

Fixed overhead (0.4 hr. @ 7.00) 2.80

Total $14.60

Selling and administrative costs:

Variable $1.60 per unit

Fixed $217,000

During the year, the company had the following activity: Units produced 26,500 Units sold 23,850 Unit selling price $35 Direct labor hours worked 10,600 Actual fixed overhead was $12,800 less than budgeted fixed overhead. Budgeted variable overhead was $4,500 less than the actual variable overhead. The company used an expected actual activity level of 10,600 direct labor hours to compute the predetermined overhead rates. Any overhead variances are closed to Cost of Goods Sold.

Required:

1. Compute the unit cost using (a) absorption costing and (b) variable costing.

2. Prepare an absorption-costing income statement. Round your answers to the nearest cent.

3. Prepare a variable-costing income statement. Round your answers to the nearest cent.

4. Reconcile the difference between the two income statements. The absorption costing generates an income $_____ than variable costing.