The following data pertains to the operations of Alpha Corporation for the year ended December 31, 2016, its first year of operations. Alpha Corporation makes computer equipment. Round ending inventory computations to the nearest dollar.
DATA FOR 2016
Sales ........................................................................ 3,650 units @ $149/unit
Variable manufacturing costs ........................................... 3,900 units @ $56/unit
Variable selling and administrative expenses ......................... $5/unit
Fixed manufacturing costs ............................................... $99,100
Fixed selling and administrative expenses ............................ $60,000
Finished goods inventory, December 31, 2016 ......................... 250 units
INSTRUCTIONS
1. Prepare an income statement for the year using the absorption costing approach.
2. Prepare an income statement for the year using the direct costing approach.
3. Explain the reason for the difference between the net income or loss computed under the two methods.
Analyze: Assume that Alpha Corporation's manufacturing managers believe that only those costs that contribute directly to product production should be assigned to cost of goods manufactured. Which costing method would these managers prefer?