The following annual flexible budget has been prepared for use in making decisions relating to product X.



100,000 units 150,000 units 200,000 units

Sales volume $ 800,000 $ 1,200,000 $ 1,600,000

Manufacturing costs:

Variable 300,000 450,000 600,000

Fixed 200,000 200,000 200,000

total 500,000 650,000 800,000

Selling and other expenses:

Variable 200,000 300,000 400,000

Fixed 160,000 160,000 160,000

total 360,000 460,000 560,000

Income (or loss) (60,000) 90,000 240,000

The 200,000 unit budget has been adopted and will be used for allocating fixed manufacturing costs to units of product X: at the end of the first six months, the following information is available.

Units

Production completed 120,000

Sales 60,000



All fixed costs are budgeted and incurred uniformly throughout the year and all costs incurred coincide with the budget. Over and under applied overhead balances treated as adjustments to cost of goods sold at the end of the year.



Required:

a. Compute the amount of over applied or under applied fixed manufacturing factory costs during the first six months under absorption costing.

b. Compute the net income (or loss) for the six months under absorption.

c. Compute the net income (or loss) for the first six months under direct costing.

d. how can the difference in reported income between the two methods be explained.