In: Accounting
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?
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 | ||||||||