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    Comparison of Variable and Full Costing

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    Profits SBU's: Compairson of Variable and Full Costing

    Harvard Company manufactures hair brushes that sell at wholesale for $2 per unit. The company had no beginning inventory in 2004. These data summarize the 2004 and 2005 operations.

    (see chart in the attached file)

    Required: Prepare the following, using a spreadsheet system

    1. An income statement for each year based on full costing
    2. An income statement for each year based on variable costing
    3. A reconciliation and explanation of the differences in the operating income resulting from using the full costing method and variable costing method

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    Solution Preview

    Absorption costing and marginal costing are methods of determining product cost. In what ways do these methods differ in their treatment of overheads.

    In product/service costing, an absorption costing system apportions a share of all costs incurred by a business to each of its products/services. In this way, it can be established whether, in the long run, each product/service makes a profit. Thus under absorption costing, all normal manufacturing costs are considered product costs and included in inventory. As sales occur, the cost of inventory is transferred to cost of goods sold; meaning that the gross profit (sales minus cost of goods sold) is reduced by all costs of manufacturing, whether those costs relate to direct materials, direct labor, variable manufacturing overhead, or fixed manufacturing overhead.

    Using an absorption costing system, the profit reported for a manufacturing business for a period will be influenced by the ...

    Solution Summary

    This provides Comparison of Variable and Full Costing