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  | 
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| 
 Variable Costing Income Statement  | 
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| 
 For the first year of operations  | 
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| 
 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  | 
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| 
 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  | 
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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