Question: Absorption and Variable Costing The Twin Lakes Company had the following actual data for 20X0 and 20X1:
The basic production data at standard unit costs for the 2 years were as follows:
Fixed factory overhead was budgeted at $146,000 per year. The expected volume of production was 14,600 units so the fixed overhead rate was $146,000 ÷ 14,600 = $10 per unit. Budgeted sales price was $79 per unit. Selling and administrative expenses were budgeted at variable, $11 per unit sold, and
fixed, $83,000 per year. Assume that there were absolutely no variances from any standard variable costs or budgeted selling prices or budgeted fixed costs in 20X0. There were no beginning or ending inventories of work in process.
1. For 20X0, prepare income statements based on standard variable (direct) costing and standard absorption costing. (The next problem deals with 20X1.)
2. Explain why operating income differs between variable costing and absorption costing. Be specific.