Question

Variable Costing, Absorption Costing.

During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,800 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,100 scoops. Fixed overhead was applied at $0.70 per unit produced. Fixed overhead was underapplied by $2,700. 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 (38,100 units @ $20) $762,000

Less: Cost of goods sold 549,960

Gross margin $212,040

Less: Selling and administrative expenses (all fixed) 184,500

Operating income $ 27,540

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. $

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. $

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 $

What is the difference between the two income figures? $

Could you please help me out ASAP! Thankyou

Answer 1

Snobegon Inc

1. Calculation of the firm’s ending inventory under absorption costing:

Unadjusted cost of goods sold = cost of goods sold (absorption costing) – underapplied overhead

= $549,960 - $2,700 = $547,260

Unit cost of goods sold = 547,260/38,100 = $14.36378 per unit

Ending inventory, 2,700 units value = 2,700 x $14.36378 = $38,782

1. Calculation of total cost of ending inventory under variable costing:

Variable unit cost = total unit cost (absorption costing) – unit fixed overhead cost

= $14.36378 - $0.70 = $13.66378

Ending inventory, 2,700 units value = 2,700 x $13.66378 = $36,892

1. Variable costing income statement:

Snobegon Inc
Variable Costing Income Statement
For the first year of operations
Sales (38,100 x $20)		$762,000
Less: variable cost of goods sold (38,100 x $13.66378)		$520,590
Contribution margin		$241,410
Less: fixed expenses
fixed overhead	$31,260
Fixed selling overhead	$184,500	$215,760
Operating Income		$25,650
note: fixed overhead = 40,800 x $0.7 + $2,700 = $31,260

1. Difference in operating incomes under the two methods:

Absorption costing income – variable costing income = $27,540 - $26,140 = $1,890

The difference in incomes under the two methods is the fixed overhead deferral in ending inventory,

2,700 units x $0.70 = $1,890