Question

Absorption and Variable Costing with Over- and Underapplied Overhead

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 (3 lbs. @ 1.25)	$3.75
Direct labor (0.4 hr. @ 14.50)	5.80
Variable overhead (0.4 hr. @ 4.00)	1.60
Fixed overhead (0.4 hr. @ 7.00)	2.80
Total	$13.95
Selling and administrative costs:
Variable	$1.80	per unit
Fixed	$220,000

During the year, the company had the following activity:

Units produced	27,000
Units sold	24,300
Unit selling price	$39
Direct labor hours worked	10,800

Actual fixed overhead was $12,800 less than budgeted fixed overhead. Budgeted variable overhead was $5,600 less than the actual variable overhead. The company used an expected actual activity level of 10,800 direct labor hours to compute the predetermined overhead rates. Any overhead variances are closed to Cost of Goods Sold.

Required:

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

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

	Unit Cost
Absorption costing	$
Variable costing	$

Feedback

The unit cost under absorption costing includes one more cost than under variable costing.

The unit cost under variable costing includes one less cost than under absorption costing.

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

Flaherty, Inc.
Absorption-Costing Income Statement
For the First Year of Operations
Sales		$
Cost of goods sold	$
Less:
Overapplied overhead
Gross profit		$
Less: Selling and administrative expenses
Operating income		$

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

Flaherty, Inc.
Variable-Costing Income Statement
For the First Year of Operations
Sales		$
	$
Add:
Contribution margin		$
Less:
	$
		$
Operating income		$

Feedback

Use a contribution margin format income statement that groups costs according to behavior (variable and fixed)

4. Reconcile the difference between the two income statements.
The absorption costing generates an income $ than variable costing.

Answer 1

1		Unit Cost
	Absorption costing	13.95
	Variable costing	11.15
2	Flaherty, Inc.
	Absorption-Costing Income Statement
	For the First Year of Operations
	Sales		947700
	Cost of goods sold	338985
	Less:
	Overapplied overhead	7200	331785
	Gross profit		615915
	Less: Selling and administrative expenses		263740
	Operating income		352175
3	Flaherty, Inc.
	Variable-Costing Income Statement
	For the First Year of Operations
	Sales		947700
	Variable cost of goods sold	270945
	Add:
	Underapplied variable overhead	5600
	Variable selling expense	43740	320285
	Contribution margin		627415
	Less:
	Fixed factory overhead	$	62800
	Selling and administrative expenses		220000
	Operating income		344615
4	Reconcilliation
	Operating Income as per absorpion costing	352175
	Less: Deferred in ending Inventory	7560
	Operating Income as per Variable costing	344615
	The absorption costing generates an income $more than variable costing
	by $7,560.