# Boots R Us produces a variety of products for the fashion industry. Cowboy-type boots are among its

## Question:

Boots R Us produces a variety of products for the fashion industry. Cowboy-type boots are among its most popular products. The company’s controller spoke to the company’s president at a meeting last week and told her that the company was doing well, but that the financial picture depended on how product costs and net income were calculated. The president did not realize that the company had options with regard to calculating these numbers, so she asked the controller to prepare some information and be ready to meet with her to talk more about this. In preparing for the meeting, the controller accumulated the following data:

Beginning inventory ............25,000

Units produced .............. 100,000

Units sold ................ 105,000

Fixed manufacturing overhead ........$400,000 Direct materials per unit ..........$ 25.00

Direct labor per unit .............$35.00 Variable manufacturing overhead per unit ....$ 15.00

Required

A. Compute the cost per unit using absorption costing.

B. Compute the cost per unit using variable costing.

C. Compute the difference in net income between the two methods. Which costing method results in the higher net income?

D. Assume that production was 80,000 units and sales were 70,000 units. What would be the difference in net income between the two methods? Which costing method shows the greater net income?

e. Assume that production was 100,000 units and sales were 100,000 units. What would be the difference in net income between the two methods?

f. Which method is required by GAAP?

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