The cost structure for Chiang Company, which began operations on January 1, is provided below:

Variable selling and administrative costs are $4 per unit sold.
During the year, the company produced 4,000 units and sold 3,500 units at the $60 selling price.

Required:

1) Prepare an income statement under absorption costing.
2) Prepare an income statement under variable costing.
3) Explain the difference between the two income amounts.
4) What absorption costing disadvantage does this exercise emphasize?

Question

The cost structure for Chiang Company, which began operations on January 1, is provided below:

Variable selling and administrative costs are $4 per unit sold.
During the year, the company produced 4,000 units and sold 3,500 units at the $60 selling price.

Required:

1) Prepare an income statement under absorption costing.
2) Prepare an income statement under variable costing.
3) Explain the difference between the two income amounts.
4) What absorption costing disadvantage does this exercise emphasize?

Quizplus · Accepted Answer

The Answer of The cost structure for Chiang Company, which began operations on January 1, is provided below:

Variable selling and administrative costs are $4 per unit sold.
During the year, the company produced 4,000 units and sold 3,500 units at the $60 selling price.

Required:

1) Prepare an income statement under absorption costing.
2) Prepare an income statement under variable costing.
3) Explain the difference between the two income amounts.
4) What absorption costing disadvantage does this exercise emphasize?

The Cost Structure for Chiang Company, Which Began Operations on January