Question: Cool Car Motors assembles and sells motor vehicles and uses standard costing. Actual data relating to April and May 2014 are as follows:

The selling price per vehicle is $27000. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 500 units. There are 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.

Requirements: Prepare April and May 2014 income statements for Cool Car Motors under (a) variable costing and (b) absorption costing.

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

Unit data                                                  April                              May

Beginning Inventory                                     0                                 100

Production                                                500                               425

Sales                                                       400                               495

Variable Costs

Manufacturing cost/unit produced              $11000                          $11000

Operating (marketing) cost/unit sold              3200                             3200

Fixed costs

Manufacturing costs                             $2000000                        $2000000

Operating (marketing) costs                     550000                            550000