Question

Absorption and variable costing
Bird’s Eye View manufactures satellite dishes used in residential and commercial installations for satellite-broadcasted television. For each unit, the following costs apply: $50 for direct material, $100 for direct labor, and $60 for variable overhead. The company’s annual fixed overhead cost is $300,000; it uses expected capacity of 5,000 units produced as the basis for applying fixed overhead to products. A commission of 10 percent of the selling price is paid on each unit sold. Annual fixed selling and administrative expenses are $72,000. The following additional information is available:

	Year 1	Year 2
Selling price per unit	$500	$500
Number of units sold	4,000	4,800
Number of units produced	5,000	4,400
Beginning inventory (units)	3,000	4,000
Ending inventory (units)	4,000	?

a. Prepare pre-tax income statements under absorption and variable costing for Year 1 and Year 2, with any volume variance being charged to Cost of Goods Sold.
Note: Do not use negative signs in your answers.

Bird’s Eye View
Income Statements (Absorption)
For the Years Ended December 31, Year 1 and Year 2
	Year 1		Year 2
Sales		Answer		Answer
CGS	Answer		Answer
Underapplied FOH	Answer	Answer	Answer	Answer
Gross profit		Answer		Answer
S&A:
Variable	Answer		Answer
Fixed	Answer	Answer	Answer	Answer
Income before taxes		Answer		Answer

b. Prepare pre-tax income statements under variable costing for Year 1 and Year 2, with any volume variance being charged to Cost of Goods Sold.
Note: Do not use negative signs in your answers.

Bird’s Eye View
Income Statements (Variable)
For the Years Ended December 31, Year 1 and Year 2
	Year 1		Year 2
Sales		Answer		Answer
CGS		Answer		Answer
Product CM		Answer		Answer
Variable S&A		Answer		Answer
Total CM		Answer		Answer
Fixed costs:
Factory	Answer		Answer
S&A	Answer	Answer	Answer	Answer
Income before taxes		Answer		Answer

c. Reconcile the differences in income for the two methods.

		Year 1	Year 2
Net income (absorption)		Answer	Answer
Net income (variable)		Answer	Answer
Difference in income		Answer	Answer
Difference equals inventory change		Answer	Answer
Times FOH application rate		Answer	Answer
Difference in income		Answer	Answer

Answer 1