Question

Oliver Inc. produces an oak rocking chair that is designed to ease back problems. The chairs sell for $200 each. Results from last year’s operations are as follows:
Inventory and production data:
Units in beginning inventory .......... 0
Units produced during the year .........20,000
Units sold during the year ........... 18,000
Variable costs (unit):
Direct materials ............... $ 70.00
Direct labor ................. 20.00
Variable manufacturing overhead ........ 15.00
Variable selling and administrative ........ 10.00
Fixed costs:
Fixed manufacturing overhead ........$500,000
Fixed selling and administrative ........ $530,000

Required
A. Compute the unit product cost for one rocking chair, assuming the company uses variable costing.
B. Prepare an income statement based on variable costing.
C. Compute the unit product cost for one rocking chair, assuming the company uses absorption costing.
D. Prepare an income statement based on absorption costing.
E. Compare the two income statements. What causes the net income to differ?
F. If the company produced 18,000 chairs and sold 20,000 chairs (assume that the additional 2,000 chairs were in the beginning inventory), what would be the impact on the two income statements? In other words, which method provides the higher net income?



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  • CreatedMarch 11, 2015
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