Variable and absorption costing income statements [25—30 minutes] Arcade Away manufactu...

Variable and absorption costing income statements [25—30 minutes]

Arcade Away manufactures video games that it sells for $45 each. The company uses a fixed manufacturing overhead rate of $6 per game. All costs and production levels are exactly as planned. The following data are from Arcade Away’s first two months in business during 2010:

Requirements

1. Compute the product cost per game produced under absorption costing and tinder variable costing.

2. Prepare monthly income statements for November, using

a. absorption costing.

b. variable costing.

3. Is operating income higher under absorption costing or variable costing in November? Explain the pattern of differences in operating income based on absorption costing versus variable costing.