Chapter 6, Problem 6.35AE

Compare absorption and variable costing (Learning Objective 6)

Royal Industries has one product. Information about the production and sales of that product for the past year follow.

Selling price per unit	$ 49.00
Direct material per unit	$ 18.00
Direct labor per unit	$ 6.00
Total annual manufacturing overhead	$ 221,000
Fixed portion of annual manufacturing overhead	$ 187,000
Variable operating expenses per unit sold	$ 3.00
Fixed operating expenses per year in total	$ 47,000
Units manufactured	17,000
Units sold	13,000

The company had no beginning inventory.

Requirements

1. 1. Prepare two income statements for the year, one using absorption costing and one using variable costing. Use those statements to answer the following questions:
   1. a. What is the product cost per unit using absorption costing?
   2. b. What is the product cost per unit using variable costing?
   3. c. What is the ending inventory balance using absorption costing?
   4. d. What is the ending inventory balance using variable costing?
   5. e. What is cost of goods sold using absorption costing?
   6. f. What is cost of goods sold using variable costing?
   7. g. What is operating income using absorption costing?
   8. h. What is operating income using variable costing?
2. 2. What is the underlying reason for the difference in operating income between the two costing methods?