Problem 1

Costner Company uses an absorption costing system in accounting for the single product it manufactures. The following selected data are for the year 2013. The company produced 12,000 units and sold 10,000 units. Direct materials and direct labor are variable costs. One unit of direct material goes into each unit of finished goods. Overhead rates are based on a volume of 12,000 units and are $1.08 and $1.44 per unit for variable and fixed overhead, respectively. The ending inventory is the 2,000 units of finished goods on hand at the end of 2013. There was no inventory at the beginning of 2013.

Hint: You must compute the cost of production per unit (12,000 units were produced) in order to compute the cost of ending inventory (2,000 units remain in ending inventory at the end of the period).

Required:

a. Prepare an income statement for 2013 under variable costing. (Template has been provided on the next page).

b. Prepare and income statement for 2013 under absorption costing. (Template has been provided on the next page).

c. Explain the reason for the difference in net income between a and b.

Units in Finished Goods Inventory Begnning +Produced -Sold Ending Units in Finished Goods Inventory Begnning +Produced -Sold Ending