Question

Great Outdoze, Inc., manufactures high-quality sleeping bags, which sell for $65.50 each. The variable costs of production are as follows:

  Direct material $ 18.70
  Direct labor 9.50
  Variable manufacturing overhead 6.10

     Budgeted fixed overhead in 20x4 was $158,600 and budgeted production was 26,000 sleeping bags. The year’s actual production was 26,000 units, of which 23,300 were sold. Variable selling and administrative costs were $1.30 per unit sold; fixed selling and administrative costs were $24,000.

Required:

1.

Calculate the product cost per sleeping bag under (a) absorption costing and (b) variable costing. (Do not round intermediate calculations and round your final answers to 2 decimal places.)

Product Cost per unit . Absorption costing . Variable costing      

2. Prepare operating income statements for the year using:

a.

Absorption costing. (Do not round intermediate calculations.)

	GREAT OUTDOZE, INC. Operating Income Statement For the Year Ended December 31, 20x4 Absorption Costing $0 Selling and Administrative Expenses $0

          

b.

Variable costing. (Do not round intermediate calculations.)

	GREAT OUTDOZE, INC. Operating Income Statement For the Year Ended December 31, 20x4 Variable Costing Variable expenses: $0 Fixed expenses: $0

            

3.

Reconcile reported operating income under the two methods using the shortcut method. What will be the difference in reported income? (Round your predetermined fixed overhead rate to 2 decimal places.)

Change in inventory (in units)×Predetermined fixed overhead rate=Absorption-costing income minus variable-costing incomeunit increase×=

Answer 1

Calculate the product cost per sleeping bag under (a) absorption costing and (b) variable costing.

	Variable costing	Absorption costing
Direct material	18.70	18.70
Direct labour	9.50	9.50
Variable manufacturing overhead	6.10	6.10
Fixed manufacturing overhead		158600/26000 = 6.10
Unit product cost	34.30	40.40

Prepare income statement under absorption costing :

Sales (23300*65.50)	1526150
Cost of goods sold (23300*40.40)	(941320)
Gross profit	584830
Selling and administrative expense (23300*1.3+24000)	(54290)
Net operating income	530540

Contribution format income statement :

Sales	1526150
Less: Variable cost of goods sold (23300*34.30)	(799190)
Less: Variable selling and administrative expense (23300*1.3)	(30290)
Contribution margin	696670
Less: Fixed manufacturing overhead	(158600)
Less: Fixed selling and adminitrative expense	(24000)
Net operating income	514070

Reconcile reported operating income under the two methods using the shortcut method. What will be the difference in reported income

Variable costing net operating income	514070
Add: Fixed manufacturing overhead cost deferred in ending inventory (6.1*2700)	16470
Absorption costing net operating income	530540