Question

Absorption and Variable Costing with Over- and Underapplied Overhead

Flaherty, Inc., has just completed its first year of operations.

The unit costs on a normal costing basis are as follows: Manufacturing costs (per unit): Direct materials (2 lbs. @ 1.20) $2.40 Direct labor (0.4 hr. @ 15.50) 6.20 Variable overhead (0.4 hr. @ 5.00) 2.00 Fixed overhead (0.4 hr. @ 8.00) 3.20 Total $13.80 Selling and administrative costs: Variable $1.70 per unit Fixed $215,000 During the year, the company had the following activity: Units produced 26,000 Units sold 23,400 Unit selling price $35 Direct labor hours worked 10,400 Actual fixed overhead was $13,400 less than budgeted fixed overhead. Budgeted variable overhead was $4,100 less than the actual variable overhead. The company used an expected actual activity level of 10,400 direct labor hours to compute the predetermined overhead rates. Any overhead variances are closed to Cost of Goods Sold.

Required: 1. Compute the unit cost using (a) absorption costing and (b) variable costing. Unit Cost Absorption costing $ Variable costing $

2. Prepare an absorption-costing income statement. Round your answers to the nearest cent. Flaherty, Inc. Absorption-Costing Income Statement For the First Year of Operations $ $ Less: Gross profit $ Operating income $

3. Prepare a variable-costing income statement. Round your answers to the nearest cent. Flaherty, Inc. Variable-Costing Income Statement For the First Year of Operations $ $ Add: Contribution margin $ Less: $ $ Operating income $

4. Reconcile the difference between the two income statements.

The absorption costing generates an income $ than variable costing.

Answer 1

1	Absorption Costing
	Direct Materials			$2.40
	Direct Labor			$6.20
	Variable Overhead			$2
	Fixed Overhead			$3.20
	Total cost			$13.80
	Variable unit cost
	Direct materials			$2.40
	Direct Labor			$6.20
	Variable overhead			$2
	Total cost			$10.60
2	Flaherty Inc
	Absorption costing Income statement
	For the First Year of Operations
	Sales	(23400*35)		819000
	Cost of Goods Sold	(23400*13.80)	322920
	Less : Overapplied overhead		9300	313620
	Gross Profit			505380
	Less : Selling and administrative expenses
	Variable Expenses	23400*1.70	39780
	Fixed Expenses		215000	254780
	Operating income			250600
	Overhead applied
	Applied Overhead
	Actual Overhead
	Overapplied overhead	0
	Budgeted Fixed overhead would be based on the 10400 direct labor hours which 10400*8							83200
	Actual fixed overhead was $ 13400 less than budgeted fixed overhead
	Actual Fixed overhead (83200-13400)							69800
	Budgeted Variable overhead (5*10400)							52000
	Actual Variable overhead (52000+4100)							56100
	Applied Overhead	135200	(83200+52000)
	Actual Overhead	125900	(69800+56100)
	Overapplied overhead	9300
3	Flaherty Inc
	Variable costing Income statement
	For the First Year of Operations
	Sales			819000
	Variable cost of goods sold	(23400*10.60)	248040
	Add : Underapplied variable overhead		4100	252140
	Variable selling expense	(23400*1.70)		39780
	Contribution Margin			527080
	Less : Fixed Factory overhead			69800
	Selling and administrative expenses			215000
	Operating Income			242280
4	Operating Income as per Absorption costing - Operating Income as per variable costing = Fixed Overhead*(Production - Sales)
	250600-242280 = 3.20*2600
	8320 = 8320