Problem: Direct vs Absorption Costing - Aristotle Inc.

Aristotle Incorporated manufactures and sells a single product. Current year sales volume is130,000 units at a selling price of $24 per unit. Aristotle Inc. uses a standard costing system. Thestandard cost of direct material and direct labour amount to $9 per unit. Variable manufacturingoverhead costs were $3 per unit plus fixed costs of $405,000 per year. The standard level of production is 135,000 units per year. Beginning inventories were 12,000 units and 135,000 unitswere produced during the year. Variable selling, general and administrative costs were $2.20 per unit sold plus fixed cost of $156,000 for the year. The income tax rate is 40%.Assume that the standard cost is constant year over year.

REQUIRED:

• Prepare an absorption costing income statement for the year.
• Prepare a contribution costing income statement for the year.
• Reconcile the difference between the two statements, absorption and contribution, andexplain why net income is different between the two costing approaches