In: Accounting
Variable Costing, Absorption Costing
During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,100 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,300 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 (38,300 units @ $20) | $766,000 |
Less: Cost of goods sold | 547,560 |
Gross margin | $218,440 |
Less: Selling and administrative expenses (all fixed) | 185,500 |
Operating income | $ 32,940 |
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.
$
Feedback
Take unit cost under absorption less fixed overhead amount per unit to get variable cost per unit for variable costing.
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 | $ |
Feedback
Use a contribution margin format income statement that groups costs according to behavior (variable and fixed)
What is the difference between the two income figures?
$
Unadjusted cost of goods sold = cost of goods sold (absorption costing) – underapplied overhead
= $547,560 - $2,800 = $544,760
Unit cost of goods sold = 544,760/38,300 = $14.22350 per unit
Ending inventory, 1,800 units value = 1,800 x $14.22350 = $25,602
Variable unit cost = total unit cost (absorption costing) – unit fixed overhead cost
= $14.22350 - $0.70 = $13.52350
Ending inventory, 1,800 units value = 1,800 x $13.52350 = $24,342
Snobegon Inc |
||
Variable Costing Income Statement |
||
For the first year of operations |
||
Sales (38,300 x $20) |
$766,000 |
|
Less: variable cost of goods sold (38,300 x $13.52350) |
$517,950 |
|
Contribution margin |
$248,050 |
|
Less: fixed expenses |
||
fixed overhead |
$30,870 |
|
Fixed selling overhead |
$185,500 |
$216,370 |
Operating Income |
$31,680 |
|
note: fixed overhead = 40,100 x $0.7 + $2,800 = $30,870 |
Absorption costing income – variable costing income = $32,940 - $31,680 = $1,260
The difference in incomes under the two methods is the fixed overhead deferral in ending inventory,
1,800 units x $0.70 = $1,260