Question

Variable Costing, Absorption Costing

During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,600 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,900 scoops. Fixed overhead was applied at $0.75 per unit produced. Fixed overhead was underapplied by $2,500. 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 (38,900 units @ $20)	$778,000
Less: Cost of goods sold	546,960
Gross margin	$231,040
Less: Selling and administrative expenses (all fixed)	185,500
Operating income	$ 45,540

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
Sales	$
Less: Variable cost of goods sold
Contribution margin	$
Less:
Fixed overhead
Fixed selling and administrative expenses
Operating income	$

What is the difference between the two income figures?
$

Answer 1

1.Computation Of Cost Of Ending Inventory as per Absorption Costing
No. of Unit Sold	38900
Cost of Goods Sold	$546,960.00
Less : Fixed Overhead Under Applied	-$2,500.00
Cost of Goods Sold Before Under Applied Overhead	$544,460.00
Cost per Unit ( 549460/38900) (a)	$13.99640
Ending Inventory ( Unit ) (40600-38900) (b)	1700
Cost Of Ending Inventory (aXb)	$23,793.88
2.Computation Of Cost Of Ending Inventory as per Variable Costing
Cost per Unit as per Absorption costing	$13.99640
Less : Fixed Overhead Applied per Unit	0.75
Cost per Unit as per Variable costing (a)	$13.24640
Ending Inventory ( Unit ) (40600-38900) (b)	1700
Cost Of Ending Inventory (axb)	$22,518.88

2..Variable Costing Income Statement- Snobegon Inc.
Particular	Amount	Amount
Sales		$778,000
Less: Variable cost of Goods Sold (13.37*38900)
Beg Inventory
Add; Variable cost of Goods Manufactured (40600*13.24640)	$537,804
Less: Ending Inventory	-$22,519	$515,285
Contribution Margin		$262,715
Less Fixed Cost
Fixed Manufacturing Overhead cost ( 40600*0.75)+2500	$32,950
Fixed Selling And Administrative Expense	$185,500	$218,450
Net Operating Income		$44,265

3.Difference between two income Figure
Oerating Income as per Absorption costing	$45,540
Operating Income as per Variable costing	$44,265
Difference	$1,275