Zaki Metal Company produces the steel wire that is used for the production of paper clips. In 2016, the first year of operations, Zaki produced 60,000 km of wire and sold 50,000 km. In 2017, the production and sales results were exactly reversed. In each year, the selling price per kilometre was $120; variable manufacturing costs were 25% of the sales price of the units produced; variable selling expenses were $9 per kilometre sold; fixed manufacturing costs were $1.5 million; and fixed administrative expenses were $300,000.
Instructions
(a) Prepare income statements for each year using variable costing. (Use the format from Illustration 8-5.)
(b) Prepare income statements for each year using absorption costing. (Use the format from Illustration 8-4.)
(c) Reconcile the differences for each year in income from operations under the two costing approaches.
(d) Comment on the effects that the production and sales levels have on net income under the two costing approaches.