Problem 17-7 Prepare income statements under absorption and variable costing; discuss reasons for differences (Appendix)

Costner Company uses an absorption costing system in accounting for the single product it manufactures. The following selected data are for the year 2018:

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 2018. There was no inventory at the beginning of 2018. (Refer to exhibit 17.12 for income statement formats.)

a. Prepare an income statement for 2018 under variable costing. b. Prepare an income statement for 2018 under absorption costing. c. Explain the reason for the difference in net income between a and b.

Sales (10,000 units) Direct materials used (variable cost) Direct labor costs (variable cost) Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $360,000 129,600 43,200 12,960 17,280 21,600 72,000