Question

Outback Corporation manufactures tactical LED flashlights in Brisbane, Australia. The firm uses an absorption costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding Outback's planned and actual operations for 20x1 follow: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Variable administrative expenses Fixed administrative expenses Total Budgeted Costs Per Unit Total $ 12.90 $1,754,400 9.20 1,251,200 4.20 571,200 4.60 625,600 7.40 1,006, 400 7.60 1,033,600 2.20 299,200 2.50 340,000 50.60 $6,881,600 Actual Costs $1,612,500 1,150,000 525,000 636, 600 858,400 1,033,600 255,200 347,000 $6,418,300 Beginning finished-goods inventory in units Sales in units Production in units Planned Activity 40,000 136,000 136,000 Actual Activity 40,000 116,000 125,000 The budgeted per-unit cost figures were based on Outback producing and selling 136,000 units in 20x1. Outback uses a predetermined overhead rate for applying manufacturing overhead to its product. A total manufacturing overhead rate of $8.80 per unit was employed for absorption costing purposes in 20x1. Any overapplied or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the year. The 20x1 beginning finished-goods inventory for absorption costing purposes was valued at the 20x0 budgeted unit manufacturing cost, which was the same as the 20x1 budgeted unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price for 20x1 was $71.50 per unit. Required: Was Outback's 20x1 operating income higher under absorption costing or variable costing? Also, compute the following: 1. The value of Outback Corporation's 20x1 ending finished-goods inventory under absorption costing. 2. The value of Outback Corporation's 20x1 ending finished-goods inventory under variable costing. 3. The difference between Outback Corporation's 20x1 reported operating income calculated under absorption costing and calculated under variable costing.

1. Compute the value of Outback Corporation’s 20x1 ending finished-goods inventory under absorption costing. (Do not round intermediate calculations.)

2. Compute the value of Outback Corporation’s 20x1 ending finished-goods inventory under variable costing. (Do not round intermediate calculations.)

3. Compute the difference between Outback Corporation’s 20x1 reported operating income calculated under absorption costing and calculated under variable costing. (Do not round intermediate calculations.)

Answer 1

1)

closing inventory (actual) = Beginning Inventory + Units produced - units sold
Closing Inventory = 40,000+125,000 - 116,000 = 49,000 units
Cost per unit = Direct material per unit + direct labour per unit + Variable manufacturing overhead + fixed Manufacturing overhead
Cost per unit = $12.90 + $9.20 + $4.20 + $4.60 = $30.90
Ending finished-goods inventory under absorption costing = Closing Inventory x Cost per unit

Ending finished-goods inventory under absorption costing = 49,000 units x $30.90 = $1,514,100

2)

Closing Inventory = 40,000+125,000 - 116,000 = 49,000 units
Cost per unit = Direct material per unit + direct labour per unit + Variable manufacturing overhead
Cost per unit = $12.90 + $9.20 + $4.20 = $26,30
Ending finished-goods inventory under Variable costing = Closing Inventory x Cost per unit

Ending finished-goods inventory under Variable costing = 49,000 units x $26.30= $1,288,700

3)

Increase in inventory in units = Production - sales = 125,000 - 116,000 = 9,000 units
Fixed manufacturing overhead = $4.60
Difference in reported income = Increase in inventory in units x Fixed manufacturing overhead

Difference in reported income = 9,000 units x $4.60 = $41,400

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