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    Variable and absorption costing, explaining operating-income differences: Nascar Motors assembles and sells motor vehicles and uses standard costing. Actual data relating to April and May 2006 are:

    The selling price per vehicle is $24,000. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 500 units. There is no price, efficiency, or spending variances. Any production-volume variance is written off to cost of goods sold in the month in which it occurs.

    1. Prepare April and May 2006 income statements for Nascar Motors under (a) variable costing and (b) absorption costing.

    2. Prepare a numerical reconciliation and explanation of the difference between operating income for each month under variable costing and absorption costing.

    See attached file for full problem description.

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    Solution Preview

    1. The difference between variable costing and absorption costing is that the fixed manufacturing expenses are expensed in the period in variable costing and are taken into inventory in absorption costing.
    The unit cost under variable costing is $10,000 which is the variable manufacturing cost and it is 10,000+2,000,000/500=14,000 under absorption costing in April and 10,000+2,000,000/400=15,000 in May, since the fixed manufacturing cost is also taken to be product cost.

    Variable Costing
    April May
    Revenues (350 x $24,000; 520 x $24,000) $8,400,000 $12,480,000
    Variable Costs
    Beginning Inventory ($10,000 x 0; 150) - 1,500,000
    Variable Manufacturing Costs ($10,000 x 500; 400) 5,000,000 4,000,000
    Cost of Goods Available for Sale 5,000,000 ...

    Solution Summary

    The solution explains the difference between variable and absorption costing using the example of Nascar Motors