Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income
High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant's operation:
Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for May.
Required:
- 1. Assume that the company uses absorption costing.
- a. Determine the unit product cost.
- b. Prepare an income statement for May.
- 2. Assume that the company uses variable costing.
- a. Determine the unit product cost.
- b. Prepare a contribution format income statement for May.
- 3. Explain the reason for any difference in the ending inventory balances under the two costing methods and the impact of this difference on reported net operating income.