Clute Company introduced a new product three years ago. Clute uses standard costing to account for the costs. The predetermined fixed overhead rate is based on budgeted normal utilization of 10,000 units per year. There were no price, spending, or efficiency variances. Production volume variances are closed to cost of goods sold. Relevant information for the Years 1, 2, and 3 follows: Year 1 Year 2 Year 3 Units produced 10,000 14,000 8,000 Units sold 9,800 10,000 10,800 Selling price $75 per unit Direct materials 9 per unit Direct labor 15 per unit Variable manufacturing overhead 11 per unit Variable marketing & administrative 8 per unit Fixed manufacturing overhead $120,000 Fixed marketing & administrative $ 70,000 REQUIRED: a. 1. What is the fixed overhead rate (FOHR) per unit for each year? 2. What is the inventoriable cost per unit under absorption costing for each year? 3. What is the inventoriable cost per unit under variable costing for each year? 4. Which method (absorption or variable) will have the higher operating income for Year 1? Why? Which method (absorption or variable) will have the higher operating income for Year 2? Why? Which method (absorption or variable) will have the higher operating income for Year 3? Why? 5. Compute the volume variance for each year. 6. Under which approach, absorption or variable, could there be a volume variance? Why? Will there ever be a volume variance under variable costing? Clute Company introduced a new product three years ago. Clute uses standard costing to account for the costs. The predetermined fixed overhead rate is based on budgeted normal utilization of 10,000 units per year. There were no price, spending, or efficiency variances. Production volume variances are closed to cost of goods sold. Relevant information for the Years 1, 2, and 3 follows: Year 1 Year 2 Year 3 Units produced 10,000 14,000 8,000 Units sold 9,800 10,000 10,800 Selling price $75 per unit Direct materials 9 per unit Direct labor 15 per unit Variable manufacturing overhead 11 per unit Variable marketing & administrative 8 per unit Fixed manufacturing overhead $120,000 Fixed marketing & administrative $ 70,000 REQUIRED: a. 1. What is the fixed overhead rate (FOHR) per unit for each year? 2. What is the inventoriable cost per unit under absorption costing for each year? 3. What is the inventoriable cost per unit under variable costing for each year? 4. Which method (absorption or variable) will have the higher operating income for Year 1? Why? Which method (absorption or variable) will have the higher operating income for Year 2? Why? Which method (absorption or variable) will have the higher operating income for Year 3? Why? 5. Compute the volume variance for each year. 6. Under which approach, absorption or variable, could there be a volume variance? Why? Will there ever be a volume variance under variable costing
