Problem: A single-product company prepares income statements using both absorption and variable costing methods. Manufacturing overhead cost applied per unit produced under absorption costing in year 2 was the same as in year 1. The year 2 variable costing statement reported a profit whereas the year 2 absorption costing statement reported a loss. The difference in reported income could be explained by units produced in year 2 being:
- Less than units sold in year 2.
- Less than the activity level used for allocating overhead to the product.
- In excess of the activity level used for allocating overhead to the product.
- In excess of units sold in year 2