Straightfoward Exercise on Absorption versus Variable Costing
Carolina Catsup Company produces catsup, which it sells exclusively to fast-food restaurant in 5-gallon containers, which sell for $16 each and have the following variable costs:
Direct material $5
Direct labor 2
Variable overhead 3
Budgeted fixed overhead in 20x0 was $300,000. Actual production of 5-gallon containers totaled 150,000, of which 125,000 were sold. The company incurred the following selling and administrative expenses:
Fixed $50,000 for the year
Variable $1 per container sold
a. Compute the standard product cost per container of catsup under (1) absorption costing and (2) variable costing.
b. Prepare income statements for 20x0 using (1) absorption costing and (2) variable costing.
c. Reconcile the income reported under two methods by listing the two key places where the income statements differ.
d. Reconcile the income reported under the two methods using the shortcut method.
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