Problem 4

BeanBag Company sells its Cornhole Set for $50 each and uses standard costing. The budgeted production level used to calculate the fixed manufacturing cost per unit is 5,000 units. Actual production was 5,600 units, and 6,000 units were sold. Assume a beginning inventory of 2,000 units and assume that the unit product cost for beginning inventory is the same as the current period unit product cost. Also, assume no price, efficiency, or spending variances. Any production volume variance is written off to cost of goods sold in the period it is incurred.

Unit manufacturing costs are:

Direct materials $6.00

Direct manufacturing labor $5.00

Variable MOH costs $4.00

Total fixed MOH costs (budgeted and actual) $15,000 per year

Marketing expenses - variable $2.00 per unit

Marketing expenses - fixed $14,000 per year

Required:

1. Calculate the unit product cost under 1) absorption costing and 2) variable costing
2. Calculate the production volume variance under absorption costing, if any
3. Prepare an income statement using variable costing. Include a schedule for variable cost of goods sold.
4. As the manager of the BeanBagCompany you have an incentive to boost current period operating income.

1. Explain why over producing (i.e., producing more units than needed for sales and desired ending inventory) can increase income under absorption costing relative to variable costing.
2. In the current period would you prefer to have operating income calculated under absorption costing or variable costing?
3. How much better (or worse) off would you be if operating income is reported under absorption costing? Show your work.