Comparing Full Absorption and Variable Costing
Refer to the information for Overhill, Inc., in PA5-4. Additional information for Overhill’s most recent year of operations follows:
Number of units produced | 2,000 |
Number of units sold | 1,300 |
Sales price per unit | $ 650.00 |
Direct materials per unit | 110.00 |
Direct labor per unit | 90.00 |
Variable manufacturing overhead per unit | 40.00 |
Fixed manufacturing overhead ($235,000/2,000 units) | 117.50 |
Variable selling expenses ($10 per unit sold) | 13,000.00 |
Fixed general and administrative expenses | 70,000.00 |
Required:
1. Without any calculations, explain whether Overhill’s income will be higher with full absorption costing or variable costing.
2. Prepare a full absorption costing income statement and a variable costing income statement for Overhill. Assume there was no beginning inventory.
3.Compute the difference in profit between full absorption costing and variable costing. Reconcile the difference.
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