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Provide income statements in both variable costing and absorption...

Provide income statements in both variable costing and absorption costing formats for an initial period and its successive period in
a case where all manufactured products within the two periods are sold by the end of the second period, but number of units sold in
the first period is less than the number of units manufactured in this period. 
What is the interesting observation in comparing the two types of income statements? 

Explain your example in detail and provide in-text citations.

Please explain your work in detail and provide in-text citations. 

Include the initial situation and the initial assumptions in your answer.

Accounting Business Managerial Accounting BUS 535 섈 쉋

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In comparing the two income statements prepared below, we noticed that the operating income on the statements can be different if units
produced do not equal to units sold during a period.

Under absorption costing, production cost is made up of all the manufacturing costs including both variable and fixed costs, and all other
non-manufacturing costs are considered as period costs. Therefore, if inventories increase then some portion of fixed manufacturing
overhead costs of the current period will not be reported on the income statement as a part of cost of goods sold, but instead deferred to
the next period as a part of cost of unsold inventory.

Under variable costing, production cost is made up of all variable manufacturing costs only. However, fixed manufacturing costs and non-
manufacturing costs are considered as period costs. In this method, fixed manufacturing overhead costs are immediately expensed on the
income statement when they are incurred, irrespective of when the related goods are sold.

In the given case, during the year 1 6,000 units have been produced but only 5,000 units of them have been sold leaving 1,000 units in
ending inventory as unsold. The absorption costing method assigned $5 in fixed manufacturing overhead cost to each unit produced.
Therefore, total $5,000 (1,000 x $5) fixed manufacturing overhead related to unsold inventory is deferred to ending inventory instead of
charging as cost of goods sold. However, the entire $30,000 fixed manufacturing costs have been charged as expense under variable
costing system.
Computing ending inventory value under absorption costing system (year 1):
= Variable manufacturing costs + Fixed manufacturing overhead
= (1,000 x $7) + (1,000 x $5)
= $7,000 + $5,000
= $12,000
Computing value of ending inventory under variable costing system (year 1):
= Variable manufacturing costs
= 1,000 x $7
= $7,000
Difference in values of ending inventory under both systems:
= $12,000 - $7,000
 = $5,000
The difference of $5,000 in ending inventory value clearly states the difference in net operating income.
Similarly in year 2, the difference of $5,000 in net operating income figures under both method occurred because this year absorption
costing method expensed extra fixed manufacturing overhead costs that was deferred with unsold units from year 1 to year 2.  
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Initial assumptions:
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Income statements:

Computing unit product cost under absorption costing:

= Direct materials + Direct labor + Variable overhead + Fixed manufacturing overhead
= $2 + $4 + $1 + ($30,000/6,000)
=  $7 + $5
= $12 per unit

Computing unit product cost under variable costing:

 = Direct materials + Direct labor + Variable overhead
= $2 + $4 + $1
= $7 per unit

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