Problem: HD Inc. produced a variety of products for the computing industry. CD burners are among its most popular products. The company's controller, Kate Jergens, 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 in regard to calculating these numbers, so she asked Katie to prepare some information and be ready to meet to with her to talk more about this. In preparing for the meeting, Katie accumulated the following data:
Units produced 100,000
Units sold 95,000
Fixed manufacturing overhead $300,000
Direct materials per unit $ 55.00
Direct labor per unit $ 25.00
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 100,000 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?