Question: Simple Comparison of Variable and Absorption Costing Kerwin Company began business on January 1, 20X1, with assets of $153,000 cash and equities of $153,000 capital stock. In 20X1, it manufactured some inventory at a cost of $56,000 cash, including $19,000 for factory rent and other fi xed factory overhead. In 20X2, it manufactured nothing and sold half of its inventory for $44,000 cash. In 20X3 it manufactured nothing and sold the remaining half for another $44,000 cash. It had no fi xed expenses in 20X2 or 20X3. There are no other transactions of any kind. Ignore income taxes. Prepare an ending balance sheet plus an income statement for 20X1, 20X2, and 20X3 under
(1) absorption costing and
(2) variable costing (direct costing). Explain the differences in net income between absorption and variable costing.