Question

Variable Costing, Absorption Costing

During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,500 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 39,000 scoops. Fixed overhead was applied at $0.70 per unit produced. Fixed overhead was underapplied by $2,800. This fixed overhead variance was closed to Cost of Goods Sold. There was no variable overhead variance. The results of the year’s operations are as follows (on an absorption-costing basis):

Sales (39,000 units @ $20)	$780,000
Less: Cost of goods sold	546,360
Gross margin	$233,640
Less: Selling and administrative expenses (all fixed)	185,500
Operating income	$ 48,140

Required:

1. Calculate the cost of the firm’s ending inventory under absorption costing. Round unit cost to five decimal places. Round your final answer to the nearest dollar.
$ ????

Feedback

What is the cost of the ending inventory under variable costing? Round unit cost to five decimal places. Round your final answer to the nearest dollar.
$ ????

Feedback

2. Prepare a variable-costing income statement. Round the unit cost to five decimal places, when required. Round your final answers to the nearest dollar. Use the rounded values in subsequent computations.

Snobegon, Inc.
Variable-Costing Income Statement
For the First Year of Operations
Sales	????
Less: Variable cost of goods sold	????
Contribution margin	????
Less:
Fixed overhead	????
Fixed selling and administrative expenses	????
Operating income	??????

Feedback

Use a contribution margin format income statement that groups costs according to behavior (variable and fixed)

What is the difference between the two income figures?
??????

Answer 1

TOTAL ENDING INVENTORY = TOTAL PRODUCTION - SOLD

40500 - 39000 = 1500

ending inventory = 1500

fixed cost calculation

condition

1) Fixed overhead was applied at $0.70 per unit

2) Fixed overhead was under applied by $2,800.

actual fixed cost cost = 0.63

( 2800 / 40500 = 0.06913

0.70 - 0.069 = 0.63 )

incurred fixed cost = 24570

39000 * 0.63 = 24570

variable cost = 546360 - 24570

= 521790

answer 1 .

absorption costing

ending inventory cost

total cost of goods sold = 546360

per unit cost = 546360 / 39000 = 14

ending inventory = 1500 * 14 = 21000

variable costing

variable cost per unit

= 521790 / 39000

= 13.37

ending inventory cost = 20055

1500 * 13.37 = 20055

answer 2.

variable costing

sales		780,000
production cost 13.37 * 39000	521790
contribution		258210
fixed cost    0.63 * 40500	25515
fixed selling cost	185500
operating profit		47195

Absorption costing includes all costs, including fixed costs, related to production, while variable costing only includes the variable costs directly incurred in production. Companies that use variable costing keep fixed-cost operating expenses separate from production costs.

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