Cornerstones of Cost Management 2nd Edition by Don Hansen ,Maryanne Mowen

Exercise 42

Absorption and Variable Costing with Over- and Underapplied Overhead
Flaherty, Inc., has just completed its first year of operations. The unit costs on a normal costing basis are as follows:

During the year, the company had the following activity:

Actual fixed overhead was $12,000 less than budgeted fixed overhead. Budgeted variable overhead was $5,000 less than the actual variable overhead. The company used an expected actual activity level of 12,000 direct labor hours to compute the predetermined overhead rates. Any overhead variances are closed to Cost of Goods Sold.
Required:
1. Compute the unit cost using (a) absorption costing and (b) variable costing.
2. Prepare an absorption-costing income statement.
3. Prepare a variable-costing income statement.
4. Reconcile the difference between the two income statements.