Ziemble Company uses a predetermined overhead rate based on normal capacity expressed in units of output. Normal capacity is 75,000 units, and the expected fixed overhead cost for the year is $300,000.
During the year, Ziemble produced 74,000 units and sold 72,000 units. There was no beginning finished goods inventory. The variable-costing income statement for the year follows:
Sales (72,000 units @ $21) $1,512,000 Less variable costs:
Variable cost of goods sold (756,000)
Variable selling expenses (360,000)
Contribution margin $ 396,000 Less fixed costs:
Fixed overhead (300,000)
Fixed selling and administrative (84,000) Operating income $ 12,000
Any under- or overapplied overhead is closed to Cost of Goods Sold. Variable cost of goods sold is already adjusted for any variable overhead variance.
1. Ziemble Company needs an income statement based on absorption costing for external reporting. Using the information provided, prepare this statement.
2. Explain the difference between the income reported by variable costing and by absorption costing.