Ceramtics manufactures a high-speed ceramic switch used in the telecommunications industry. Data about Ceramtics’s operations for 2017 and 2018 are presented below:
Ceramtics
Summary of Operations
2017 and 2018
2017 2018
Sales price/switch $4,400 $4,400
Number of switches sold 2,000 2,000
Number of switches produced 2,400 1,600
Fixed manufacturing costs $2.4 million $2.4 million
Variable manufacturing costs per switch $2,800 $2,800
Ceramtics had no beginning inventories in 2017. To simplify the computations, assume Ceramtics has only manufacturing expenses (i.e., there are no selling, administration, distribution, or interest expenses and no taxes). Ceramtics uses the FIFO method for inventory costing. Assume that budgeted volume and actual volume are the same, budgeted fixed and actual fixed overhead are the same, and budgeted variable and actual variable overhead per switch are the same. In other words, at the end of the year there is no over- or underabsorbed overhead.
Required:
a. Prepare income statements for 2017 and 2018 using absorption costing.
b. Prepare income statements for 2017 and 2018 using variable costing.
c. Reconcile any differences in income for 2017 and 2018 between absorption costing and variable costing from parts (a) and (b). That is, explain why absorption and variable costing give different net income numbers in 2017 and 2018.