Answer:
Task 1(a): Unit product cost:
Year 1: $37
Year 2: $37
Task 1(b):
Net income in year 1: $460,000
Net income in year 2: $650,000
Task 2(a):
Unit product cost under absorption costing:
Year 1: $42
Year 2: $43
Task 2(b):
Year 1: Profit: $500,000
Year 2: Profit: $590,000
Task 3:
Reconciliation is attached
Explanation:
Task 1:
Assume the company uses variable costing:
a. Compute the unit product cost for Year 1 and Year 2.
Solution:
Under variable costing, only variable costs are included to calculate the unit cost.
We will consider the following costs:
- Variable manufacturing overheads
1b. Prepare an income statement for Year 1 and Year 2:
Under variable costing, an income statement considers, variable cost as product cost and all fixed costs are considered as period cost.
Key matrix:
Contribution in year 1: $760,000
Contribution in year 2: $950,000
Net income in year 1: $460,000
Net income in year 2: $650,000
Task 2:
Assume the company uses absorption costing:
2a. Compute the unit product cost for Year 1 and Year 2.
Unit product cost under absorption costing:
Year 1: $42
Year 2: $43
2b. Prepare an income statement for Year 1 and Year 2.
Year 1: Profit: $500,000
Year 2: Profit: $590,000
Task 3:
Reconcile the difference between variable costing and absorption costing net operating income in Year 1.
Reconciliation is attached
