During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota),...

Question:

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 38,200 scoops. Fixed overhead was applied at $0.75 per unit produced. Fixed overhead was underapplied by $2, 900. 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, 200 units @ $20) $764,000
Less: Cost of goods sold 546, 260
Gross margin $217, 740
Less: Selling and administrative expenses (all fixed) 184, 500
Operating income $ 33, 240

Required:

1. Calculate the cost of the firm's ending inventory under absorption costing. What is the cost of the ending inventory under variable costing? (Round unit costs to five significant digits.)

2. Prepare a variable-costing income statement. Reconcile the difference between the two income figures.

Variable Costing Income Statement:

Only variable manufacturing costs are included in cost of goods sold when preparing income statements using variable costing. All fixed overhead costs incurred in the production of goods are added after the calculation of contribution margin.

Answer and Explanation:

1.

Cost of Ending Inventory Under Absorption Costing

Particulars Amount ($)
Cost of goods sold given 546,260
Less: Fixed overhead under applied -2,900
Cost of 38200 units 543,360
Cost per unit (WN 1) 14.22
Ending inventory under absorption costing (WN 2) 25,596

_____

Cost of Ending Inventory Under Variable Costing

Particulars Amount ($)
Cost of 38,200 units 543,360
Less: Fixed cost (WN 3) -28,650
Total variable cost 514,710
Variable cost per unit 13.47
Ending inventory under Variable costing (WN 4) 24,246


2.

Variable costing income statement

Particulars Amount ($)
Sales 764,000
Less: Variable Cost -514,710
Contribution 249,290
Fixed manufacturing overhead (WN 5) -32,900
Selling and Admin expenses -184,500
Net Income $31,890

Difference between two income figures

Operating income (Absorption costing) $33,240
Operating income (Variable income) $31,890
Difference (Cost of ending inventory deferred under absorption costing) $$1,350 (1,800 x 0.75)

Working Notes:

1. (Cost per unit = {eq}\frac{\$543,360}{38.200} {/eq} = 14.22)

2. (Ending inventory under absorption costing = (40,000 - 38,200) * $ 14.22 = 25,596)

3. (Fixed cost = 38,200 * $ 0.75 per unit = 28,650)

4. (Ending inventory under Variable costing = 1,800 units * $13.47 = 24,246)

5. 40,000 * 0.75 + 2900 = 32,900


Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

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Chapter 13 / Lesson 5
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