Question - Simple Comparison of Variable and Absorption Costing

Khalid Company began business on January 1, 20X1, with assets of $150,000 cash and equities of $150,000 capital stock. In 20X1, it manufactured some inventory at a cost of $60,000 cash, including $16,000 for factory rent and other fixed factory overhead. In 20X2, it manufactured nothing and sold half of its inventory for $43,000 cash. In 20X3, it manufactured nothing and sold the remaining half for another $43,000 cash. It had no fixed expenses in 20X2 or 20X3.

There are no other transactions of any kind. Ignore income taxes.

Prepare an ending balance sheet plus an income statement for 20X1, 20X2, and 20X3 under

(1) absorption costing and

(2) variable costing (direct costing).

Explain the differences in net income between absorption and variable costing.