Absorption and variable income and uses, reconcile incomes Security Vehicles
converts Hummers into luxury, high–security vehicles by adding a computerized alarm and radar system and various luxury components. The finished vehicles are sold for $100,000 each. Variable production costs (including the cost of the basic Hummer) are about $60,000 per vehicle. Fixed production costs are $60,000 per month. The fixed costs for administrative and selling expenses are $20,000 per month plus $5,000 per
vehicle sold. At the beginning of last year Security had no inventories. In January it produced four vehicles and sold three. In February it produced five and sold six.
REQUIRED:
• A. What is the operating income for January if Security uses a variable costing
system?
• B. What is the operating income for January if Security uses an absorption costing
system using actual volume as the denominator?
• C. Reconcile the difference between the absorption and variable costing operating
incomes in February.
• D. Explain why Security Vehicles might produce both variable and absorption
income statements for the same time period
