Direct and absorption costing methods are compared using financial information from XYZ Products for the year ended December 31, 20X8. Under direct costing, the unit cost is $18 and includes direct materials, direct labor, and variable factory overhead. Absorption costing adds a portion of fixed factory overhead to the unit cost, resulting in a cost of $20.50 per unit. Income statements are to be prepared for 20X8 using both direct and absorption costing methods.

1. 5. Direct and absorption costing
The information that follows pertains to XYZ Products for the
year ended December 31, 20X8.
Inventory, 1/1/X8
24,000 units
Units manufactured
80,000
Units sold
104,000
Inventory, 12/31/X8
23000 units
Manufacturing costs:
Direct materials
$4 per unit
Direct labor
$5 per unit
Variable factory overhead
$9 per unit
Fixed factory overhead
$300,000
Selling & administrative expenses:
Variable
$2 per unit
Fixed
$136,000
1.Direct costing.
Direct materials
$4.00
Direct labor
$5.00
Variable factory overhead

2. $9.00
Unit cost
$18.00
2.Absorption costing.
Direct materials
4.00
Direct labor
5.00
Variable factory overhead
9.00
Fixed factory overhead
1.70
($136000/80000)
$20.50
Assuming a unit cost of $26 per
The unit selling price is $26. Assume that costs have been
stable in recent years.
Homework
a.
Prepare an income statement for the year ended December 31,
20X8, by using direct costing.

3. b.
Prepare an income statement for the year ended December 31,
20X8, by using absorption costing.