Question

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 38,500 scoops. Fixed overhead was applied at $0.70 per unit produced. Fixed overhead was underapplied by $2,800. 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 (38,500 units @ $20)	$770,000
Less: Cost of goods sold	546,360
Gross margin	$223,640
Less: Selling and administrative expenses (all fixed)	185,500
Operating income	$ 38,140

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
	$
Contribution margin	$
Less:
Operating income	$

What is the difference between the two income figures?
$

Answer 1

Solution 1:

Unit product cost under absorption costing = Unadjusted cost of goods sold / Nos of unit sold

= ($546,360 - $2,800) / 38500 = $14.11844 per unit

Ending inventory under absorption costing = Units in ending inventory *Cost per unit = (40700 - 38500) * $14.11844

= $31,061

Unit cost under variable costing = Unit cost under absorption costing - Fixed manufacturing overhead

= $14.11844 - $0.70 = $13.41844

Ending inventory under variable costing = 2200 * $13.41844 = $29,521

Solution 2:

Snobegon, Inc.
Variable-Costing Income Statement
For the First Year of Operations
Sales	$770,000.00
Variable costs (38500*$13.41844)	$516,610.00
Contribution margin	$253,390.00
Less:
Fixed manufacturing overhead (40700*$0.70 + $2,800)	$31,290.00
Fixed selling and administrative expenses	$185,500.00
Operating income	$36,600.00

Solution 3:

difference between the two income figures = $38,140 - $36,600 = $1,540