Question:
(Absorption and variable costing) Bird's Eye View manufactures satellite dishes used in residential and commercial installations for satellite-broadcasted television. For each unit, the following costs apply: $50 for direct material, $100 for direct labor, and $60 for variable overhead. The company's annual fixed overhead cost is $750,000; it uses expected capacity of 12,500 units produced as the basis for applying fixed overhead to products. A commission of 10 percent of the selling price is paid on each unit sold. Annual fixed selling and administrative expenses are $180,000. The following additional information is available:
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2010
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2011
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Selling price per unit
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$ 500
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$ 500
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Number of units sold
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10,000
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12,000
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Number of units produced
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12,500
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11,000
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Beginning inventory (units)
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7,500
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10,000
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Ending inventory (units)
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10,000
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?
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Prepare pre-tax income statements under absorption and variable costing for the years ended 2010 and 2011, with any volume variance being charged to Cost of Goods Sold. Reconcile the differences in income for the two methods.