Variable and Absorption Costing

question 3

Essay

Variable and Absorption Costing
Varilux manufactures a single product and sells it for $10 per unit.At the beginning of the year there were 1,000 units in inventory.Upon further investigation,you discover that units produced last year had $3.00 of fixed manufacturing cost and $2.00 of variable manufacturing cost.During the year Varilux produced 10,000 units of product.Each unit produced generated $3.00 of variable manufacturing cost.Total fixed manufacturing cost for the current year was $40,000.There were no inventories at the end of the year.
Required:
Prepare two income statements for the current year,one on a variable cost basis and the other on an absorption cost basis.Explain any difference between the two net income numbers and provide calculations supporting your explanation of the difference.

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