Problem 1 Absorption Costing vs. Variable Costing: Benefits and Calculation of Net Operating Income
NOTE: No Excel template is provided for this problem. Please create your own spreadsheet to calculate the solution.
HD Inc. produces a variety of products for the computing industry. CD burners are among its most popular products. The company's controller, Katie 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 operating 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 with her to talk more about this issue. In preparing for the meeting, Katie accumulated the following data:
Required:
If an amount is zero, enter "0".
A. Compute the cost per unit, using absorption costing.
B. Compute the cost per unit, using variable costing.
C. Compute the difference in net operating income between the two methods.
Which costing method results in the higher net operating income?
D. Assume that production was 100,000 units and sales were 100,000 units. What would be the difference in net operating income between the two methods?
E. Which method is required by generally accepted accounting principles?