Vaquero, Inc., has just completed its first year of operations. The unit costs on a normal costing basis are as follows:

Manufacturing costs (per unit):

Direct materials (2 lbs. @ $3.50) ....$ 7.00

Direct labor (0.5 hr. @ $16) ......8.00

Variable overhead (0.5 hr. @ $6) ....3.00

Fixed overhead (0.5 hr. @ $9) .....4.50

Total ..............$22.50

Selling and administrative costs:

Variable .....$3 per unit

Fixed ........$123,000

During the year, the company had the following activity:

Units produced ......24,000

Units sold ........21,300

Unit selling price ........$35

Direct labor hours worked ...12,000

Actual fixed overhead was $12,000 less than budgeted fixed overhead. Budgeted variable overhead was $5,000 less than the actual variable overhead. The company used an expected actual activity level of 24,000 direct labor hours to compute the predetermined overhead rates. Any overhead variances are closed to Cost of Goods Sold.

Required:

1. Compute the unit cost using:

a. Absorption costing

b. Variable costing

2. Prepare an absorption-costing income statement.

3. Prepare a variable-costing income statement.

4. Reconcile the difference between the two income statements.