bsorption 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$.$ @ $1\mathrm{.}35)$ $$2\mathrm{.}70$

Direct labor $(0\mathrm{.}4$ hr$.$ @ $15\mathrm{.}50)6\mathrm{.}20$

Variable overhead $(0\mathrm{.}4$ hr$.$ @ $4\mathrm{.}00)1\mathrm{.}60$

Fixed overhead $(0\mathrm{.}4$ hr$.$ @ $7\mathrm{.}00)2\mathrm{.}80$

Total $$13\mathrm{.}30$

Selling and administrative costs:

Variable $$1\mathrm{.}90$ per unit

Fixed $$216,000$

During the year, the company had the following activity:

Units produced $27,500$

Units sold $24,750$

Unit selling price $$34$

Direct labor hours worked $11,000$

Actual fixed overhead was $$13,600$ less than budgeted fixed overhead. Budgeted variable overhead was $$4,900$ less than the actual variable overhead. The company used an expected actual activity level of $11,000$ 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 baac$5703$bfb$7036\_1$

Variable costing $fill in the blank baac$5703$bfb$7036\_2$

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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

Sales

blank $Sales

Cost of goods sold

$Cost of goods sold

blank

Less: blank blank

Overapplied overhead

Overapplied overhead

Overapplied overhead

Gross profit blank $fill in the blank $0$dedaa$04$b$05$bfa$8\_8$

Less: Selling and administrative expenses

blank Less: Selling and administrative expenses

Operating income blank $fill in the blank $0$dedaa$04$b$05$bfa$8\_11$

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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

Sales

blank $Sales

Variable cost of goods sold

$Variable cost of goods sold

blank

Add: blank blank

Underapplied variable overhead

Underapplied variable overhead

Underapplied variable overhead

Variable selling expense

blank Variable selling expense

Contribution margin blank $fill in the blank $27465808$af$9$afa$7\_10$

Less: blank blank

Fixed factory overhead

$Fixed factory overhead

blank

Selling and administrative expenses

Selling and administrative expenses

$Selling and administrative expenses

Operating income blank $fill in the blank $27465808$af$9$afa$7\_16$

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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.

The absorption costing generates an income $fill in the blank $945$f$61$fe$0047$fe$7\_1$

more

than variable costing.