Absorption and Variable Costing with Over- and Underapplied Overhead

Flaherty, Inc., has just completed its first year of operations.

Manufacturing costs (per unit):
Direct materials (2 lbs. @ 1.40)	$2.80
Direct labor (0.4 hr. @ 16.00)	6.40
Variable overhead (0.4 hr. @ 4.00)	1.60
Fixed overhead (0.4 hr. @ 7.00)	2.80
Total	$13.60
Selling and administrative costs:
Variable	$1.70	per unit
Fixed	$216,000

During the year, the company had the following activity:

Units produced	26,500
Units sold	23,850
Unit selling price	$37
Direct labor hours worked	10,600

Actual fixed overhead was $11,200 less than budgeted fixed overhead. Budgeted variable overhead was $4,300 less than the actual variable overhead. The company used an expected actual activity level of 10,600 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	$13.60
Variable costing	$10.80

2. Prepare an absorption-costing income statement. Round your answers to the nearest cent.

Sales	blank	$
Cost of goods sold	$	blank
Less:	blank	blank
Overapplied overhead
Gross profit	blank	$
Less: Selling and administrative expenses	blank
Operating income	blank	$

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	$	blank
Add:	blank	blank
Underapplied variable overhead
Variable selling expense	blank
Contribution margin		$
Less:
Fixed factory overhead	$	blank
Selling and administrative expenses		$
Operating income	blank	$

4. Reconcile the difference between the two income statements. The absorption costing generates an income $_______ more than variable costing.