Question 1. Absorption & Variable Costing

Eversoft Manufacturing produces towels to be sold as souveniers at sporting events throughout the world. Assume that units produced equalled units sold in 2016. The companys variable-costing income statement is as follows:

Eversoft Manufacturing

Income Statement

Year Ended December 31, 2016

Variable Costing

Sales (260,700 units) $521,400

Variable cost of goods sold $255,486

Variable selling expenses 31,284

Variable administrative expenses 36,498 323,268

Contribution margin 198,132

Fixed manufacturing overhead 93,852

Fixed selling expenses 38,500

Fixed administrative expenses 42,625 174,977

Net Income $ 23,155

Unit selling price $2.00

Variable costs per unit

Direct material .26

Direct labour .34

Variable overhead .38

Variable selling expenses .12

Variable administrative expenses .14

Required:

a) Calculate the manufacturing cost per towel under variable costing.

b) Calculate the manufacturing cost per towel under absorption costing.

c) Prepare an absorption costing income statement for Eversoft Manufacturing

d) Explain why or why not there is a difference in net income amounts in the two income statements.

e) Explain why Eversoft Manufacturing might want to prepare both an absorption and variable costing statements.