Question

Variable Costing, Absorption Costing

During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,700 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,700 scoops. Fixed overhead was applied at $0.70 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 (38,700 units @ $20)	$774,000
Less: Cost of goods sold	547,560
Gross margin	$226,440
Less: Selling and administrative expenses (all fixed)	184,500
Operating income	$ 41,940

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) Ending inventory (absorption costing)
Cost of goods sold					547560
Fixed overhead underapplied					2900
cost of goods sold before adjusting under applied overhead					544660
Unit sold					38700
cost per unit					14.0739
cost of ending inventory (absorption costing)					28147.8
(40700-38700)*14.0739
Cost of ending inventory (variable costing)
cost per unit					14.0739
Fixed overhead per unit					0.7
unit cost under variable costing					13.3739
Cost of ending inventory (variable costing)(40700-38700)*13.3739					26747.8
2) Varibale costing income statement
sale					774000
less: variable cost of goods sold
variable cost of goods manufactured (40700*13.3739)				544317.7
variable cost of goods available for sale				544317.7
less:closing inventory available cost of goods sold				26747.8	517569.9
Contribution margin					256430.1
less: fixed cost
Fixed manufacturing cost (40700*0.70)+2900				31390
fixed selling & adm cost				184500	215890
Net operating income					40540.1
Difference between two income figure				1400
(40700-38700)*0.70

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