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Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon,...

Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,700 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,700 scoops. Fixed overhead was applied at $0.75 per unit produced. Fixed overhead was underapplied by $3,000. 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 (38,700 units @ $20) $774,000 Less: Cost of goods sold 548,960 Gross margin $225,040 Less: Selling and administrative expenses (all fixed) 184,500 Operating income $ 40,540 Required:

1. (a) 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.

$

1. (b) 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 Take unit cost under absorption less fixed overhead amount per unit to get variable cost per unit for variable costing.

2. (a) Prepare a variable-costing income statement. Round the unit cost to five decimal places, when required. Round your final answers to the nearest dollar.

2. (b) What is the difference between the two income figures? $

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Solution

Snobegon

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

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

= $548,960 - $3,000 = $545,960

Unit cost of goods sold = 545,960/38,700 = $14.10749 per unit

Ending inventory, 2,000 units value = 2,000 x $14.10749 = $28,215

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

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

= $14.10749 - $0.75 = $13.35749

Ending inventory, 2,000 units value = 2,000 x $13.35749 = $26,715

2a. Variable costing income statement:

Snobegon Inc

Variable Costing Income Statement

For the first year of operations

Sales (38,700 x $20)

$774,000

Less: variable cost of goods sold (38,700 x $13.35749)

$516,935

Contribution margin

$257,065

Less: fixed expenses

fixed overhead

$33,525

Fixed selling overhead

$184,500

$218,025

Operating Income

$39,040

note: fixed overhead = 40,700 x $0.75 + $3,000 = $33,525

2b. Difference in operating incomes under the two methods:

Absorption costing income – variable costing income = $40,540 - $39,040 = $1,500

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

2,000 units x $0.75 = $1,500


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