Question

In: Accounting

Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon,...

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?
$

Solutions

Expert Solution

  1. Calculation of the firm’s ending inventory under absorption costing:

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

  1. Calculation of total cost of ending inventory under variable costing:

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

  1. Variable costing income statement:

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

  1. Difference in operating incomes under the two methods:

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


Related Solutions

Variable Costing, Absorption Costing. During its first year of operations, Snobegon, Inc. (located in Lake Snobegon,...
Variable Costing, Absorption Costing. During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,800 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,100 scoops. Fixed overhead was applied at $0.70 per unit produced. Fixed overhead was underapplied by $2,700. 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...
Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon,...
Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,900 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 $0.75 per unit produced. Fixed overhead was underapplied by $3,000. 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...
Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon,...
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 38,600 scoops. Fixed overhead was applied at $0.75 per unit produced. Fixed overhead was underapplied by $2,700. 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...
Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon,...
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...
Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon,...
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 38,700 scoops. Fixed overhead was applied at $0.75 per unit produced. Fixed overhead was underapplied by $3,000. 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...
Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon,...
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...
Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon,...
Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,500 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,600 scoops. Fixed overhead was applied at $0.75 per unit produced. Fixed overhead was underapplied by $2,700. 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...
Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon,...
Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,000 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,100 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...
Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon,...
Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,500 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 39,000 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...
Inventory Valuation under Absorption and Variable Costing At the end of the first year of operations,...
Inventory Valuation under Absorption and Variable Costing At the end of the first year of operations, 5,100 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows: Direct materials $38.30 Direct labor 14.00 Fixed factory overhead 5.70 Variable factory overhead 5.00 Determine the cost of the finished goods inventory reported on the balance sheet under (a) the absorption costing concept and (b) the variable costing concept. Absorption costing $ Variable costing $
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT