Varible and Absorption Costing
See the attached file.
Essex Company applies fixed manufacturing overhead costs to its only product on the basis of each year’s production. Thus, a new fixed manufacturing overhead rate is computed each year.
1. Compute the unit product cost for each year under:
a. absorption costing
b. variable costing
2. Prepare a contribution format variable costing income statement for each year.
3. Reconcile the variable costing and absorption costing and net operating income figures for each year.
4. Explain to the president why, under absorption costing, the net operating income for Year 2 was higher than the net operating income for Year 1, although the same number of units was sold in each year.
5. a. Explain how operations would have differed if Year 2 if the company had been using Lean Production and ending inventories had been eliminated.
b. If Lean Production had been used during Year 2, what would the company’s net operating income have been under absorption costing? Explain the reason for any difference between this income figure and the figure reported by the company in the statements above.