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 40,000 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 follows (on an absorption-costing basis):

Sales (38,100 units @ $20) $762,000
Less: Cost of goods sold 548,760
     Gross margin $213,240
Less: Selling and administrative expenses (all fixed) 185,500
     Operating income $ 27,740

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.

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.

What is the difference between the two income figures?

Solutions

Expert Solution

1 Cost of ending inventory=Units in ending inventory*Unit cost under absorption costing
Units in ending inventory=Units produced-Units sold=40000-38100=1900 units
Unit cost under absorption costing=Cost of goods sold under absorption costing/units sold=548760/38100=$ 14.40315 per unit
Cost of ending inventory=1900*14.40315=$ 27366
2 Unit cost under variable costing=Unit cost under absorption costing-Fixed overhead applied per unit=14.40315-0.75=$ 13.65315
Variable costing income statement:
$ $
Sales (38100 units at $ 20) 762000
Less: Cost of goods sold (38100*13.65315) 520185
Gross margin 241815
Less: Fixed expenses
Fixed overhead (40000*0.75) 30000
Selling and administrative expense 185500 215500
Operating income 26315
Difference=27740-26315=$ 1425

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