Great Outdoze Company manufactures sleeping bags, which sell for $65 each. The variable costs of production are as follows:
Direct material | $20 |
Direct labor | 11 |
Variable manufacturing overhead | 8 |
Budgeted fixed overhead in 20x1 was $200,000 and budgeted production was 25,000 sleeping bags. The year’s actual production was 25,000 units, of which 22,000 were sold. Variable selling and administrative costs were $1 per unit sold; fixed selling and administrative costs were $30,000. The firm does not prorate variances.
Required:
1. Calculate the product cost per sleeping bag under (a) absorption costing and (b) variable costing.
2. Prepare income statements for the year using (a) absorption costing and (b) variable costing.
3. Reconcile reported income under the two methods using the shortcut method.
4. Suppose that Great Outdoze Company implemented a JIT inventory and production management system at the beginning of 20x1. In addition, the firm installed a flexible manufacturing system. Would you expect reported income under variable and absorption costing to be different by as great a magnitude as you found in requirement (3)? Explain.
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