The Cost Structure for Chiang Company,which Began Operations on January

question 38

Essay

The cost structure for Chiang Company,which began operations on January 1,is provided below:
$\begin{array}{ll}\text { Direct materials } & \$ 18 \text { per unit } \\\text { Direct labor } & \$ 14 \text { per unit } \\\text { Manufacturing overhead: } & \\\text { Variable } & \$ 8 \text { per unit } \\\text { Fixed } & \$ 20,000(\$ 5.00 \text { per unit })\end{array}$ $$\text { Fixed selling and administative } \quad\quad \$ 12,000$$ Variable selling and administrative costs are $4 per unit sold.
During the year,the company produced 4,000 units and sold 3,500 units at the $60 selling price.
Required:
1)Prepare an income statement under absorption costing.
2)Prepare an income statement under variable costing.
3)Explain the difference between the two income amounts.
4)What absorption costing disadvantage does this exercise emphasize?

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Definitions:

Laffer Curve

A theoretical representation of the relationship between tax rates and the amount of tax revenue collected by governments, indicating an optimal tax rate that maximizes revenue.

Tax Revenue

The income that is gained by governments through taxation, crucial for funding public services and infrastructure.

Price Ceiling

A legal maximum price set by the government for a particular good or service, intended to prevent prices from becoming excessively high.

Shortage

A situation where the demand for a product exceeds its supply in a market.