Question

1. Variable Costing, Absorption Costing

   During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,500 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,100 scoops. Fixed overhead was applied at $0.75 per unit produced. Fixed overhead was underapplied by $2,700. 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 (38,100 units @ $20)	$762,000
   Less: Cost of goods sold	548,760
   Gross margin	$213,240
   Less: Selling and administrative expenses (all fixed)	185,500
   Operating income	$ 27,740

   Required:

   1. Calculate the cost of the firm’s ending inventory under absorption costing. Round unit cost to five decimal places. Round your final answer to the nearest dollar.
   $

   What is the cost of the ending inventory under variable costing? Round unit cost to five decimal places. Round your final answer to the nearest dollar.
   $

   2. Prepare a variable-costing income statement. Round the unit cost to five decimal places, when required. Round your final answers to the nearest dollar. Use the rounded values in subsequent computations.

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

   What is the difference between the two income figures?
   $

Answer 1

1	Absorption costing
	Cost of goods sold for 38100 units	548760
	Per unit cost	14.40315	(548760/38100)
	Ending inventory 14.40315*2400	34568
2	Per unit cost	14.40315
	Total cost for 40500 units	583328
	Fixed cost applied	30375
	Variable cost	552953
	number of units	40500
	Variable cost per unit	13.65315
	ending inventory	2400
	Cost of ending inventory	32768	(13.65315*2400)
3	Variable cost income statement
	Sales	762000	(20*38100)
Less	Variable cost	520185
	Contribution margin	241815
Less	Fixed cost
	cost of goods sold	30375
	Selling and admin expense	185500
	Total fixed cost	215875
	Operating income	25940
4	Difference between net income	1800	(30375/40500*2400)
	Fixed cost portion of ending inventory is difference