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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Definitions:

Accrued Interest

The amount of interest that has accumulated on a debt since the last payment date but has not yet been paid.

Bond Interest Rate

The fixed or variable rate of interest paid by bond issuers on the principal amount, to bondholders until maturity.

Interest Payment Date

The specific date set for the payment of interest on a loan or bond.

Operating Activities

Activities that relate directly to the primary operations of the company, such as manufacturing, distribution, and marketing.