Question

Flaherty, Inc., has just completed its first year of operations. The unit costs on a normal costing basis are as follows:

Manufacturing costs (per unit):

Direct materials (2 lbs. @ 1.45): $2.90

Direct labor (0.4 hr. @ 16.00): $6.40

Variable overhead (0.4 hr. @ 5.00): $2.00

Fixed overhead (0.4 hr. @ 7.00): $2.80

Total: $14.10

Selling and administrative costs:

Variable: $1.90 per unit

Fixed: $221,500

During the year, the company had the following activity:

Units produced: 26,000

Units sold: 23,400

Unit selling price: $39

Direct labor hours worked: 10,400

Actual fixed overhead was $11,400 less than budgeted fixed overhead. Budgeted variable overhead was $5,400 less than the actual variable overhead. The company used an expected actual activity level of 10,400 direct labor hours to compute the predetermined overhead rates. Any overhead variances are closed to Cost of Goods Sold.

1) Compute the unit cost using (a) absorption costing and (b) variable costing.

2) Prepare an absorption-costing income statement. Round your answers to the nearest cent.

Sales: ____?____

Cost of Goods Sold: ____?____

Less: Over-applied Overhead: ____?____

Gross Profit: ____?____

Less: Selling and Administration Expenses: ____?____

Operating Income: ____?____

3) Prepare a variable-costing income statement. Round your answers to the nearest cent.

Sales: ____?____

Variable Cost of Goods Sold: ____?____

Add: Under-applied Overhead: ____?____

Add: Variable Selling Expense: ____?____

Contribution Margin: ____?____

Less: Fixed Factory Overhead: ____?____

Less: Selling and Administration Expenses: ____?____

Operating Income: ____?____

4) Reconcile the difference between the two income statements.
The absorption costing generates an income $_______ (More or Less) then variable costing.

Answer 1

1) Computation of unit cost under variable costing and absorption costing:

2) Following is the absorption costing income statement:

The resulting sheet is as follows:

3) Following is the variable costing income statement:

The resulting sheet is as follows:

4) The absorption costing generates an income of $7,280, more than variable costing.