Problem: Direct vs. Absorption Costing- Butron Company
The Butron Company uses variable costing for internal management purposes and full-absorption costingfor external reporting purposes. Thus, at the end of each year, financial information must be convertedfrom variable costing to full-absorption costing for external reports.At the end of last year, management anticipated that sales would rise 20 percent this year. Therefore, production was increased from 20,000 units to 24,000 units. However, economic conditions kept salesvolume at 20,000 units for both years.The following data pertain to the two years:
Last Year This Year
Selling price per unit $ 60 $ 60Sales (units) 20,000 20,000Beginning inventory (units) 2,000 2,000Production (units) 20,000 24,000Ending inventory (units) 2,000 6,000Variable cost per unit for both years was composed of:Labour $15.00Materials 9.00Variable overhead 6.00$30.00 Estimated and actual fixed costs for each year were:Production $180,000Selling and administrative 200,000$380,000
Required -
a. Present the income statement based on variable costing for this year.
b. Present the income statement based on full-absorption costing for this year.
c. Explain the difference, if any, in the operating profit figures