Question

Great Outdoze Company manufactures sleeping bags, which sell for $66.10 each. The variable costs of production are as follows: Direct material $ 20.00 Direct labor 10.10 Variable manufacturing overhead 6.20 Budgeted fixed overhead in 20x1 was $232,000 and budgeted production was 29,000 sleeping bags. The year’s actual production was 29,000 units, of which 26,000 were sold. Variable selling and administrative costs were $1.30 per unit sold; fixed selling and administrative costs were $27,000.

Required:

1. Calculate the product cost per sleeping bag under (a) absorption costing and (b) variable costing.

	Product Cost Per Unit Absorption costing Variable costing

2-a. Prepare operating income statements for the year using absorption costing. (Do not round intermediate calculations.)

	GREAT OUTDOZE, INC. Operating Income Statement For the Year Ended December 31, 20x1 Absorption Costing $0 Selling and Administrative Expenses $0

2-b. Prepare operating income statements for the year using variable costing. (Do not round intermediate calculations.)

	GREAT OUTDOZE, INC. Operating Income Statement For the Year Ended December 31, 20x1 Variable Costing Variable expenses: $0 Fixed expenses: $0

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

Change in inventory (in units) × Predetermined fixed overhead rate = Absorption-costing income minus variable-costing income unit increase × =

Answer 1

1)			product cost
			per unit
	Absorption costing		44.3
	Variable costing		36.3
				absorption	Variable
	Direct materials			20	20
	direct labor			10.1	10.1
	Variable manufacturing overhead			6.2	6.2
	FOH	(232000/29000)		8
	unit product cost			44.3	36.3
2)a)	operating income statement for the year ended Dec 31.2014
	Absorption costing
	sales				1718600
	less : cost of goods sold				1,151,800
	Gross profit				566,800
	less:Selling and administrative expense
	Variable selling expense				33800
	fixed selling and adm cost				27,000
	Net operating income				506,000
b)	Variable costing
	Sales				1718600
	Variable expenses:
	Variable cost of goods sold				943800
	variable selling and adm cost				33800
	Contribution margin				741000
	Fixed expense
	fixed manufacturing overhead				232000
	fixed selling and administrative cost				27,000
	net operating income				482,000
3)	change in inventory(in units)			*	predetermined	=	aborption costing income
					FOH rate		- variable costing income
	3,000	unit increase		*	8	=	24,000