Question

Violins Galore produces? student-grade violins for beginning violin students. The company produced 2,200 violins in its first month of operations. At? month-end, 550 finished violins remained unsold. There was no inventory in work in process. Violins were sold for $117.50 each. Total costs from the month are as? follows:

Direct materials used	$94,800
Direct labor	$60,000
Variable manufacturing overhead	$30,000
Fixed manufacturing overhead	$41,800
Variable selling and administrative expenses	$7,000
Fixed selling and administrative expenses	$13,700

1a. Total expenses shown below the contribution margin line

2a. Dollar value of ending inventory under absorption costing

3a. Dollar value of ending inventory under variable costing

4a. Which income statement will have a higher operating? income? By how? much? Explain

Answer 1

Solution 1a:

Total expenses to be shown below the contribution margin line = Fixed manufacturing overhead + Fixed selling and administrative expenses = $41,800 + $13,700 = $55,500

Solution 2a:

Computation of manufacturing cost - Absorption costing
Particulars	Amount
Direct material used	$94,800.00
Direct labor	$60,000.00
Variable manufacturing overhead	$30,000.00
Fixed manufacturing overhead	$41,800.00
Total manufacturing cost	$226,600.00

Manufacturing cost per unit = $226,600 / 2200 = $103 per unit

Value of ending inventory under absorption costing = Ending inventory * Manufacturing cost per unit = 550 * $103 = $56,650

Solution 3a:

Computation of manufacturing cost - Variable costing
Particulars	Amount
Direct material used	$94,800.00
Direct labor	$60,000.00
Variable manufacturing overhead	$30,000.00
Total manufacturing cost	$184,800.00

Manufacturing cost per unit = $184,800 / 2200 = $84 per unit

Value of ending inventory under variable costing = Ending inventory * Manufacturing cost per unit = 550 * $84 = $46,200

Solution 4a:

Absorption costing income statement will have higher income as under absorption costing fixed manufacturing overhead are deferred in ending inventory while in variable costing fixed manufacturing overhead charged to income statement.

Therefore fixed manufacturing overhead deferred in ending inventory under absorption costing = $41,800 * 550 / 2200 = $10,450

Therefore absorption costing income statement will have higher income by $10,450