Question

TroutPro Co. manufactures fishing equipment. During 2016, total costs associated with manufacturing 12,500 fly-cast fishing rods (a new product introduced this year) were as follows:

Raw materials	$	64,900
Direct labor		18,300
Variable manufacturing overhead		13,850
Fixed manufacturing overhead		18,000

a. Calculate the cost per fishing rod under both variable costing and absorption costing. (Round your answers to 2 decimal places.)

Variable cost per road: __________ each

Absorption cost per road:__________ each

b. If 310 of these fishing rods were in finished goods inventory at the end of 2016, by how much and in what direction (higher or lower) would 2016 operating income be different under variable costing than under absorption costing? (Do not round intermediate calculations.)

Under variable costing, operating income would be______ , __________ than under absorption costing

c-1. Express the fishing rod cost in a cost formula. (Round your answers to 2 decimal places.)

Total cost = _______ + ____________ per fishing rod produced

c-2. What does this formula suggest the total cost of making an additional 200 fishing rods would be? (Round your intermediate calculations and final answer to 2 decimal places.)

Total additional cost ____________

Answer 1

a.

TroutPro Compnay
Computation of cost
	Variable	Absorption
	Costing	Costing
Raw Materials	64900	64900
Direct labor	18300	18300
Variable Manufacturing overhead	13850	13850
Fixed Manufacturing overhead		18000
Total Cost	97050	115050
No. of units produced	12500	12500
Cost per fishing rod	7.764	9.204

b.

If 310 units of fishing rods lies in the finished goods inventory at the close of the year, the value of the closing inventory will be as below:

Under Variable Costing method: 310 units x $ 7.76 = $ 2405.6

Under Absorption Costing method: 310 units x $ 9.204 = $ 2853.24

Difference between the inventory value: $ 2853 - $ 2406 = $ 447

Under absorption costing the net operating income will be higher by $ 447 than that under the variable costing system. Because absorption costing system takes fixed manufacturing overhead into account while computing per unit product cost and consequently finished goods lying in inventory will be valued higher also.