Question

Accounting Homework

Question 4 Flounder Industries makes artificial Christmas trees. The unit costs for producing a tree are: Direct materials Direct labor Variable overhead Fixed averhead $23 $14 $14 The company also incurs $1 per tree in variable selling and administrative costs and $3,400 in fixed marketing costs. At the beginning of the year the company had 870 trees in the beginning Finished Goods Inventory. The company produced 2,450 trees during the year. Sales totaled 1,400 trees at a price of $101 per tree. (a) Based on absorption costing, what was the company's operating income for the year? Company's operating income (b) Based on variable costing, what was the company's operating income for the year? Company's operating Income (c) Assume that in the following year the company produced 2,450 trees and sold 2,600. Based on absorption costing, what was the operating income for that year? Based on variable costing, what was the operating income for that year? Absorption Costing Variable Costing Operating income

Answer 1

(a)

Total product cost per unit = Direct material + Direct labor + Variable overhead + Fixed overhead

= $23 + $14 + $14 + $3

= $54

Total selling and administrative expense:

= (Units sold X Variable selling and administrative costs) + Fixed marketing costs

= (1,400 X $1) + $3,400

= $4,800

Absorption costing operating income:

= [Units sold X (Selling price per unit - Total product cost per unit)] - Total selling and administrative expense

= [1,400 X ($101 - $54)] - $4,800

= $61,000

(b)

Total variable cost = Direct material + Direct labor + Variable overhead + Variable selling and administrative costs

= $23 + $14 + $14 + $1

= $52

Total fixed cost = (Units produced X Fixed cost) + Fixed marketing costs

= (2,450 X $3) + $3,400

= $10,750

Variable costing net operating income:

= [Units sold X (Selling price per unit - Variable cost per unit)] - Total fixed cost

= [1,400 X ($101 - $52)] - $10,750

= $57,850

(c)

Total selling and administrative expense:

= (Units sold X Variable selling and administrative costs) + Fixed marketing costs

= (2,600 X $1) + $3,400

= $6,000

Absorption costing operating income:

= [Units sold X (Selling price per unit - Total product cost per unit)] - Total selling and administrative expense

= [2,600 X ($101 - $54)] - $6,000

= $116,200

Variable costing net operating income:

= [Units sold X (Selling price per unit - Variable cost per unit)] - Total fixed cost

= [2,600 X ($101 - $52)] - $10,750

= $116,650