On January 2, Mclntire Reel Company began production of a new model. First quarter sales were 20,000 units and second quarter sales were 26,000 units at a unit price of $10. Unit production costs each quarter were: direct materials, $1; direct labor, $2; and variable factory overhead, $1.50. Fixed factory overhead was $62,400 each quarter and, for absorption costing, is assigned to inventory based on actual units produced.
Each quarter, marketing and administrative expenses consisted of a $15,000 fixed portion and a variable portion equal to 5% of sales. Units produced in the first and second quarters totaled 30,000 and 20,000, respectively. The fifo inventory costing method is used.
Required:
(1) Prepare comparative income statements for the first and second quarters under the absorption costing method.
(2) Prepare comparative income statements for the first and second quarters under the direct costing method.
(3) Compute and reconcile the differences in operating income under the two methods for each quarter.