The reconciliation that explains the difference in the absorption and variable costing net operating incomes will be explained in a multi-step process as follows:

Calculate the fixed portion of the predetermined overhead rate as follows:

Total budgeted fixed manufacturing overhead (a)

Total budgeted direct labor-hours (b)

Fixed portion of the predetermined overhead rate (rounded) (a) (b)

Calculate the amount by which the number of units produced during the year exceeds the number of units sold:

Total units produced (see production budget)

Total units sold (see production budget)

Units produced in excess of unit sales

-

Culate the amount of fixed manufacturing overhead that will be attached to each unit produced during 2022:

Fixed portion of the predetermined overhead rate (rounded) (a)

Budgeted direct labor-hours per unit (b)

Budgeted fixed manufacturing overhead per unit (a) * (b)

Calculate the amount of fixed manufacturing overhead that will be attached to the 450 units that are produced during the year and retained in ending finished goods inventory as of December 31, 2022:

Units produced and unsold (a)

450

Budgeted fixed manufacturing overhead per unit (b)

-

Budgeted fixed manufacturing overhead deferred in ending inventory (rounded) (a) (b)

Reconcile the variable and absorption costing net operating incomes as follows:

Variable costing net operating income

Add fixed manufacturing overhead cost deferred in inventory under absorption costing

Absorption costing net operating income

-

Endless Mountain Company manufactures a single product that is popular with outdoor recreation enthusiasts. The company sells its product to retailers throughout the northeastern quadrant of the United States. It is in the process of creating a master budget for 2022 and reports a balance sheet at December 31,2021 as follows: The company's chief financial officer (CFO), in consultation with various managers across the organization has developed the following set of assumptions to help create the 2022 budget: 1. The budgeted unit sales are 12,000 units, 37,000 units, 15,000 units, and 25,000 units for quarters 14, respectively. Notice that the company experiences peak sales in the second and fourth quarters. The budgeted selling price for the year is $32 per unit. The budgeted unit sales for the first quarter of 2023 is 13,000 units. 2. All sales are on credit. Uncollectible accounts are negligible and can be ignored. Seventy-five percent of all credit sales are collected in the quarter of the sale and 25% are collected in the subsequent quarter. 3. Each quarter's ending finished goods inventory should equal 15% of the next quarter's unit sales. 4. Each unit of finished goods requires 3.5 yards of raw material that costs $3.00 per yard. Each quarter's ending raw materials inventory should equal 10% of the next quarter's production needs. The estimated ending raw materials inventory on December 31,2022 is 5,000 yards. 5. Seventy percent of each quarter's purchases are paid for in the quarter of purchase. The remaining 30% of each quarter's purchases are paid in the following quarter. 6. Direct laborers are paid $18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete. All direct labor costs are paid in the quarter incurred. 7. The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhead is $150,000 including $20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred. 8. The budgeted variable selling and administrative expense is $1.25 per unit sold. The fixed selling and administrative expenses per quarter include advertising ($25,000), executive salaries ($64,000), insurance ($12,000), property tax ($8,000), and depreciation expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred. 9. The company plans to maintain a minimum cash balance at the end of each quarter of $30,000. Assume that any borrowings take place on the first day of the quarter. To the extent possible, the company will repay principal and interest on any borrowings on the last day of the fourth quarter. The company's lender imposes a simple interest rate of 3% per quarter on any borrowings. 10. Dividends of $15,000 will be declared and paid in each quarter. 11. The company uses a last-in, first-out (LIFO) inventory flow assumption. This means that the most recently purchased raw materials are the "first-out" to production and the most recently completed finished goods are the "first-out" to customers