Question

Problem 8-35 Variable-Costing and Absorption-Costing Income Statements (LO 8-2, 8-3, 8-4, 8-6)

Great Outdoze Company manufactures sleeping bags, which sell for $67.00 each. The variable costs of production are as follows:

Direct material	$	18.50
Direct labor		9.50
Variable manufacturing overhead		7.20

Budgeted fixed overhead in 20x1 was $169,400 and budgeted production was 22,000 sleeping bags. The year’s actual production was 22,000 units, of which 19,700 were sold. Variable selling and administrative costs were $2.10 per unit sold; fixed selling and administrative costs were $29,000.

Required:
1. Calculate the product cost per sleeping bag under (a) absorption costing and (b) variable costing.
2-a. Prepare an operating income statement for the year using absorption costing.
2-b. Prepare an operating income statement for the year using variable costing.
3. Reconcile reported operating income under the two methods using the shortcut method.

Please share Question 3 -Answer.

change in inventory(in Units) X Predetermined fixed overhead rate = Absorption-costing income minus variable-costing income

Answer 1

	Great Outdoze Inc.
	Units in Beginning Inventory	0
	Units Produced during the year	22000
	Units sold during the year	19700
	Closing Inventory	2300
	Product cost per sleeping bag under Absorption Costing
1)	Production	22000
	Sales	19700
	Variable Manufacturing Cost=(A)	$                             35.20
	Fixed Manufacturing Cost=Fixed Production Cost/Production	$169400/22000
	Fixed Manufacturing Cost=(B)	$                               7.70
	Unit Product Cost=Variable Manufacturing cost+Fixed Manufacturing cost=(A)+(B)	$                             42.90
	Product cost per sleeping bag under variable Costing
	Production	22000
	Sales	19700
	Direct Material	$                             18.50
	Direct Labor	$                               9.50
	Variable manufacturing overhead	$                               7.20
	Total variable cost per sleeping bag	$                             35.20
	Variable manufacturing cost=Direct Material+Direct labor+Variable manufacturing overhead
		Product cost per unit
	Absorption costing	$                             42.90
	Variable costing	$                             35.20
`	Great Outdoze Inc.
2a)	Operating Income statement for the year ended december 31st,20*1
	Absorption costing
	Sales(19700*$67)=(A)	$              13,19,900.00
	Cost of goods sold =(19700*$42.90)=(B)	$                 8,45,130.00
	Gross Margin=(C )=(A)-(B)	$                 4,74,770.00
	Selling & Administrative Expenses=(D)=(19700*$2.1+$29000)	$                    70,370.00
	Net Operating Income=(C )-(D)	$                 4,04,400.00
	Income Statement under Variable Costing
	Revenue(18000*$66)=(A)	$              13,19,900.00
	Variable cost:
	Beginning Inventory=(i)
2b)	Add: Variable manufacturing cost(22000*$35.20)=(ii)	$                 7,74,400.00
	Cost of goods available for sales=(III)=(i)+(II)	$                 7,74,400.00
	Less: Ending Inventory,(2300*$35.2)=(Iv)	$                   -80,960.00
	Variable cost of good sold=(I)+(III)-(Iv)	$                 6,93,440.00
	Variable selling & Administrative cost(19700*$2.1)	$                    41,370.00
	Total Variable cost=(B)	$                 7,34,810.00
	Contribution Margin=(C )=(A)-(B)	$                 5,85,090.00
	Less: Fixed Cost=(D )
	Fixed Manufacturing cost	$                 1,69,400.00
	Fixed selling and administrative cost	$                    29,000.00
	Net Operating Income=(C )-(D)	$                 3,86,690.00
3)
	Difference arises in Variable and Absorption Costing Method due to fixed Manufacturing Overhead cost deferred in Inventory
	Year	Year 1
	Variable Costing Net Operating Profit	$                 3,86,690.00
	Add: Fixed Manufacturing Overhead cost deferred in Inventory	$                    17,710.00
	Less: Fixed Manufacturing Overhead in Beginning Inventory
	Net Operating Income under Absoption costing	$                 4,04,400.00
	Change in Inventory	Predermined rate	Absorption costing income-Variable costing income
	2300	$                               7.70	17,710.00