Diaz Company had the following operating data for its first two years of operations: Variable costs per unit:
Direct materials $ 4.00
Direct labor 2.00
Variable overhead 1.50
Fixed costs per year:
Overhead $120,000
Selling and administrative 163,800
Diaz produced 30,000 units in the first year and sold 26,000. In the second year, it produced 26,000 units and sold 30,000 units. The selling price per unit each year was $22. Diaz uses an actual cost system for product costing.
Required
1. Prepare income statements for both years using absorption costing. Has firm performance, as measured by income, improved or declined from Year 1 to Year 2?
2. Prepare income statements for both years using variable costing. Has firm per- formance, as measured by income, improved or declined from Year 1 to Year 2?
3. Calculate the fixed overhead rate for Year 1.
4. Calculate the Year 1 value of ending inventory under absorption costing and under variable costing.