Question

C4) Skinny Dippers, Inc. produces nonfat frozen yogurt. The product is sold in ten-gallon containers, which have the following price and variable costs.

Sales price	$	40
Direct material		14
Direct labor		6
Variable overhead		9

Budgeted fixed overhead in 20x1, the company’s first year of operations, was $340,000. Actual production was 170,000 ten-gallon containers, of which 160,000 were sold. Skinny Dippers, Inc. incurred the following selling and administrative expenses.

Fixed	$	510,000		for the year
Variable	$	1		per container sold

Required:

1. 1. Compute the product cost per container of frozen yogurt under (a) variable costing and (b) absorption costing.

2. 2-a. Prepare operating income statements for 20x1 using absorption costing.

3. 2-b. Prepare operating income statements for 20x1 using variable costing.

4. 3. Reconcile the operating income reported under the two methods by listing the two key places where the income statements differ.

5. 4. Reconcile the operating income reported under the two methods using the shortcut method.

Answer 1

Answer 1
Calculation of per unit product cost
	Variable costing	Absorption costing
Direct Material	$14	$14
Direct Labor	$6	$6
Variable Overhead	$9	$9
Fixed overhead [$340000 / 170000 units]		$2
Per unit Product cost per container of Frozen Yogurt	$29	$31
Answer 2-a
Operating Income statement for the year 20x1 using Absorption costing
SKINNY DIPPERS, INC.
Absorption costing Operating Income statement
For the Year ended December 31,20X1
Sales Revenue	$40*160000	$6,400,000
Less : Cost of goods sold	$31*160000	$4,960,000
Gross Margin		$1,440,000
Less : Selling and Administrative expenses
- Variable selling and administrative	$1*160000	$160,000
- Fixed selling and administrative	$510,000.00	$510,000
Operating Income		$770,000
Answer 2-b
SKINNY DIPPERS, INC.
Variable costing Operating Income statement
For the Year ended December 31,20X1
Sales Revenue	$40*160000	$6,400,000
Less : Variable expenses
Cost of goods sold [$29 * 160000]	$4,640,000
Variable selling and administrative	$160,000	$4,800,000
Contribution Margin		$1,600,000
Less : Fixed Expenses
- Fixed Manufacturing Overheads	$340,000
- Fixed selling and administrative	$510,000	$850,000
Operating Income		$750,000
Answer 3
Reconciliation
Cost of goods sold under absorption costing			$4,960,000
Variable manufacturing costs under variable costing			$4,640,000
Subtotal			$320,000
Fixed Manufacturing overhead as period expense under variable costing			$340,000
Total			($20,000)
Operating Income under Variable costing			$750,000
Less : Operating Income under absorption costing			$770,000
Difference in Operating Income			($20,000)
Answer 4
Change in inventory (in units) x Predetermined Fixed Overhead rate = Difference in reported operating income
10000 units x $2 per unit = $20,000