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 (2 lbs. @ 1.40)	$2.80
Direct labor (0.4 hr. @ 15.00)	6.00
Variable overhead (0.4 hr. @ 4.00)	1.60
Fixed overhead (0.4 hr. @ 6.00)	2.40
Total	$12.80
Selling and administrative costs:
Variable	$1.50	per unit
Fixed	$216,500

During the year, the company had the following activity:

Units produced	26,000
Units sold	23,400
Unit selling price	$34
Direct labor hours worked	10,400

Actual fixed overhead was $13,400 less than budgeted fixed overhead. Budgeted variable overhead was $5,000 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:

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1. Compute the unit cost using (a) absorption costing and (b) variable costing.

	Unit Cost
Absorption costing	$fill in the blank 178b78061fe1fba_1
Variable costing	$fill in the blank 178b78061fe1fba_2

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The unit cost under absorption costing includes one more cost than under variable costing.

The unit cost under variable costing includes one less cost than under absorption costing.

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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

Cost of goods soldOverapplied overheadSalesSelling and administrative expensesSales	blank	$Sales
Cost of goods soldSalesSelling and administrative expensesUnderapplied overheadCost of goods sold	$Cost of goods sold	blank
Less:	blank	blank
Overapplied overheadSalesSelling and administrative expensesUnderapplied overheadOverapplied overhead	Overapplied overhead	Overapplied overhead
Gross profit	blank	$fill in the blank a9ce9af7fffd038_8
Less: Cost of goods soldLess: Overapplied overheadLess: SalesLess: Selling and administrative expensesLess: Selling and administrative expenses	blank	Less: Selling and administrative expenses
Operating income	blank	$fill in the blank a9ce9af7fffd038_11

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Absorption costing assigns all manufacturing costs to each unit produced.

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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

Fixed factory overheadSalesSelling and administrative expensesVariable selling expenseSales	blank	$Sales
Fixed factory overheadOverapplied variable overheadSalesVariable cost of goods soldVariable cost of goods sold	$Variable cost of goods sold	blank
Add:	blank	blank
Fixed factory overheadOverapplied variable overheadSelling and administrative expensesUnderapplied variable overheadUnderapplied variable overhead	Underapplied variable overhead	Underapplied variable overhead
Fixed factory overheadSelling and administrative expensesOverapplied variable overheadVariable selling expenseVariable selling expense	blank	Variable selling expense
Contribution margin	blank	$fill in the blank b53cf202af80040_10
Less:	blank	blank
Fixed factory overheadUnderapplied variable overheadVariable cost of goods soldVariable selling expenseFixed factory overhead	$Fixed factory overhead	blank
Selling and administrative expensesUnderapplied variable overheadVariable cost of goods soldVariable selling expenseSelling and administrative expenses	Selling and administrative expenses	$Selling and administrative expenses
Operating income	blank	$fill in the blank b53cf202af80040_16

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Use a contribution margin format income statement that groups costs according to behavior (variable and fixed)

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4. Reconcile the difference between the two income statements.