Boots r us produces a variety of products for the fashion industry, cowboy type boots are among its most popular products. The company controller spoke to the company president at a meeting last week and told her 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 with regard to calculating these numbers, so she asked the controller to prepare some information and be ready to meet with her to talk more about the issue. In preparing for the meeting, the controller accumulated the following data;
Beginning inventory- 25,000
Units produced- 100,000
Units sold- 105,000
Fixed manufacturing overhead- $400,000
Direct materials per unit -$ 25.00
Direct labor per unit- $35.00
Variable manufacturing overhead per unit- $15.00
1- Compute the cost per unit, using absorption costing
2- Compute the cost per unit, using variable costing.
3- Compute the difference in net operating income between the two methods. Which costing method results in the higher net operating income?
4- Assume that production was 100,000 units and sales were 70,000 units.What would be the difference in the operating income between the two methods? Which costing method shows the greater net operating income?
5- 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?
6- Which method is required by generally accepted accounting principles?