Arthur Corporation Wants to Change to the Variable Costing Method

Essay

Arthur Corporation wants to change to the variable costing method of inventory valuation for making internal decisions. The LIFO method is being used. The absorption statements of income for Years 1 and 2 are as follows:
*Selling and administrative expenses include variable costs of $2 per unit sold.
Production data are as follows:
Required:
a. Compute the absorption cost per unit manufactured in Years 1 and 2.
b. Explain why the net income for Year 1 was higher than the net income for Year 2 when the same number of units was sold in each year.
c. Prepare income statements for both years using variable costing.
d. Reconcile the absorption costing and variable costing net income figures for each year. Start with variable costing net income.