Question

Absorption and Variable Costing with Over- and Underapplied Overhead Flaherty, Inc., has just completed its first year of operations. The unit costs on a normal costing basis are as follows: Manufacturing costs (per unit): Direct materials (3 lbs. @ 1.30) $3.90 Direct labor (0.4 hr. @ 17.50) 7.00 Variable overhead (0.4 hr. @ 4.00) 1.60 Fixed overhead (0.4 hr. @ 6.00) 2.40 Total $14.90 Selling and administrative costs: Variable $1.60 per unit Fixed $217,500 During the year, the company had the following activity: Units produced 26,000 Units sold 23,400 Unit selling price $35 Direct labor hours worked 10,400 Actual fixed overhead was $12,600 less than budgeted fixed overhead. Budgeted variable overhead was $4,600 less than the actual variable overhead. The company used an expected actual activity level of 10,400 direct labor hours to compute the predetermined overhead rates. Any overhead variances are closed to Cost of Goods Sold. Required: 1. Compute the unit cost using (a) absorption costing and (b) variable costing. Unit Cost Absorption costing $ Variable costing $ Feedback 2. Prepare an absorption-costing income statement. Round your answers to the nearest cent. Flaherty, Inc. Absorption-Costing Income Statement For the First Year of Operations Sales $ Cost of goods sold $ Less: Overapplied overhead Gross profit $ Less: Selling and administrative expenses Operating income $ Feedback 3. Prepare a variable-costing income statement. Round your answers to the nearest cent. Flaherty, Inc. Variable-Costing Income Statement For the First Year of Operations Sales $ Variable cost of goods sold $ Add: Underapplied variable overhead Variable selling expense Contribution margin $ Less: Fixed factory overhead $ Selling and administrative expenses $ Operating income $ Feedback 4. Reconcile the difference between the two income statements. The absorption costing generates an income $ than variable costing.

Answer 1

1		Unit Cost
	Absorption costing	14.9
	Variable costing	12.5
2	Flaherty, Inc.
	Absorption-Costing Income Statement
	For the First Year of Operations
	Sales		819000
	Cost of goods sold	348660
	Less:
	Over-applied overhead	8000	340660
	Gross profit		478340
	Less: Selling and administrative expenses		254940
	Operating income		223400
3	Flaherty, Inc.
	Variable-Costing Income Statement
	For the First Year of Operations
	Sales		819000
	Variable cost of goods sold	292500
	Add:
	Under-applied variable overhead	4600
	Variable selling expense	37440	334540
	Contribution margin		484460
	Less:
	Fixed factory overhead	$	49800
	Selling and administrative expenses		217500
	Operating income		217160
4	Reconciliation
	Operating Income as per absorption costing	223400
	Less: Deferred in ending Inventory(26000-23400)*2.4	6240
	Operating Income as per Variable costing	217160
	The absorption costing generates an income $more than variable costing by $6,240