The following data pertains to the operations of Eastern Industries for the year ended December 31, 2016, its first year of operations. Eastern Industries makes kitchen appliances. Round ending inventory computations to the nearest dollar.
DATA FOR 2016
Sales ......................................................................3,700 units @ $67/unit
Variable manufacturing costs .........................................4,000 units @ $32/unit
Variable selling and administrative costs ..............................................$4/unit
Fixed manufacturing costs ..............................................................$52,000
Fixed selling and administrative expenses ............................................$25,000
Finished goods inventory, December 31, 2016......................................300 units
INSTRUCTIONS
1. Prepare an income statement for the year using the absorption costing approach.
2. Prepare an income statement for the year using the direct costing approach.
3. Explain the reason for the difference between the net income or loss computed by the two different methods.
Analyze: Under the absorption costing method, what percentage of cost of goods sold is attributable to fixed manufacturing costs?