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. @ 1.20)	$2.40
Direct labor (0.4 hr. @ 17.00)	6.80
Variable overhead (0.4 hr. @ 5.00)	2.00
Fixed overhead (0.4 hr. @ 6.00)	2.40
Total	$13.60
Selling and administrative costs:
Variable	$1.70	per unit
Fixed	$218,500

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 $4,500 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
Variable costing

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.

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

Feedback

Absorption costing assigns all manufacturing costs to each unit produced.

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

Feedback

Use a contribution margin format income statement that groups costs according to behavior (variable and fixed)

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