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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 $(3$ lbs$.$ @ $1\mathrm{.}30)$ $$3\mathrm{.}90$

Direct labor $(0\mathrm{.}4$ hr$.$ @ $15\mathrm{.}00)6\mathrm{.}00$

Variable overhead $(0\mathrm{.}4$ hr$.$ @ $5\mathrm{.}00)2\mathrm{.}00$

Fixed overhead $(0\mathrm{.}4$ hr$.$ @ $6\mathrm{.}00)2\mathrm{.}40$

Total $$14\mathrm{.}30$

Selling and administrative costs:

Variable $$1\mathrm{.}80$ per unit

Fixed $$216,000$

During the year, the company had the following activity:

Units produced $26,000$

Units sold $23,400$

Unit selling price $$36$

Direct labor hours worked $10,400$

Actual fixed overhead was $$11,200$ less than budgeted fixed overhead. Budgeted variable overhead was $$5,700$ 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 eca$90$ffc$2$fe$5$f$8$a$\_1$

$14\mathrm{.}30$

Variable costing $fill in the blank eca$90$ffc$2$fe$5$f$8$a$\_2$

$11\mathrm{.}90$

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Feedback

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

$842,400$

Cost of goods sold

$Cost of goods sold

$334,620$

blank

Less: blank blank

Overapplied overhead

Overapplied overhead

$5,500$

Overapplied overhead

Gross profit blank $fill in the blank ef$26$a$409203$d$03$f$\_8$

Less: Selling and administrative expenses

blank Less: Selling and administrative expenses

Operating income blank $fill in the blank ef$26$a$409203$d$03$f$\_11$

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Feedback

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

blank $$-$ Select $-$

$$-$ Select $-$

blank

Add: blank blank

$-$ Select $-$

$-$ Select $-$

blank $-$ Select $-$

Contribution margin blank $fill in the blank $6332930$bcf$86$fc$9\_10$

Less: blank blank

$$-$ Select $-$

blank

$-$ Select $-$

$$-$ Select $-$

Operating income blank $fill in the blank $6332930$bcf$86$fc$9\_16$

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Feedback

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 $7483$e$8$f$97$fa$3025\_1$

than variable costing.