Exercise 18.15

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 (4lbs. @$1.50) $6.00

Direct labor (0.5hr. @$18) $9.00

Variable Overhead (0.5hr. @ $6) $3.00

Fixed overhead (0.5 hr. @ $9) $4.50

Total $22.50

Selling and administrative costs:

Variable $2 per unit

Fixed $238,000

During the year, the company had the following activity:

Units produced 24,000

Units sold 21,300

Unit selling price $36

Direct labor hours worked 12,000

Actual fixed overhead was $12,000 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 12,000

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. Round your answers to the

nearest cent.

Unit Cost:

Absorption costing $ 22.50

Variable costing $ 18

2. Prepare an absorption-costing income statement.

Flaherty, Inc.

Absorption-costing Income Statement

For the First Year of Operations

Sales 766,800

Less:

Cost of goods sold 479,250

Overapplied overhead _________? _________?

Gross profit _________?

Less: Selling and administrative 280,600

Operating income ___________?

3. Prepare a variable-costing income statement.

Flaherty, Inc.

Variable-Costing Income Statement

For the First Year of Operations

Sales 766,800

Less:

Variable cost of goods sold ___________?

Underapplied variable overhead __________? ____________?

Variable selling expense 42,600

Contribution margin _____________?

Less:

Fixed factory overhead ____________?

Selling and administrative expense __________? ____________?

Operating income _____________?

4. Reconcile the difference between the two income statements.

The absorption costing generates an income ____________? higher than variable costing.