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 38,600 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 follows (on an absorption-costing basis):

Sales (38,600 units @ $20)	$772,000
Less: Cost of goods sold	546,860
Gross margin	$225,140
Less: Selling and administrative expenses (all fixed)	185,500
Operating income	$ 39,640

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.
$

Feedback

Determine the number of units in ending inventory first. Calculate unit cost after determining unadjusted COGS (before adjustment for underapplied fixed overhead).

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?
$

Answer 1

Solution :-

1 ) :-

Calculation of cost of ending inventory :-

Particulars	Amount
Cost of goods sold	$546,860
Fixed overhead under applied	$2,700
Cost of goods sold before adjusting Under applied overhead	= $546,860 - $2,700 = $544,160
Units sold	38,600
Per unit cost	= $544,160 / 38,600 = $14.097
Cost of ending inventory under Absorption costing	= [ 40,600 - 38,600 ] * $14.097 = $28,194

Cost of the ending inventory under variable costing :-

Particulars	Amount
Per unit cost	$14.097
Fixed over head per unit	$0.75
Units cost under variable costing	=  $14.097 - $0.75 = $13.34
Cost of ending inventory under variable costing	=  [ 40,600 - 38,600 ] * $13.34 = 2,300 * $13.34 = $30,682

2 ) :-

Variable-costing income statement :-

	Amount	Amount
Sales		$772,000
Variable cost of goods sold opening inventory	-
Variable cost of goods Manufactured during the year	= 40,600 * $13.34 = $541,604
Variable cost of goods available for sale	$541,604
Closing inventory of variable cost of goods sold	$30,682	= $541,604 - $30,682 = $510,922
Contribution margin		= $772,000 -  $510,922 = $261,078
Less:
Fixed overhead	= [ 40,600 * 0.75 ] + $2,700 = $30,450 + $2,700 = $33,150
Fixed selling and administrative expenses	$185,500	= $185,500 + $33,150 = $218,650
Operating income		= $261,078 - $218,650 = $42,428

What is the difference between the two income figures?

Difference between the two income figures = [ 40,600 - 38,600 ] * $0.75

= 2,000 * $0.75

= $1,500

Difference between the two income figures = $1,500