Susan Company commenced business with the investment of $1,372,000 in its operating assets on 1 January 2021 to produce a single product – a handmade barbecue grill. The company planned to produce and sell 30,000 units with the estimated selling price of $30 per unit during the year and provided the following estimates:

Variable costs per unit

Direct materials $10 Direct labor $3 Variable manufacturing overhead $2 Variable selling and administrative expenses $5

Fixed costs per year

Fixed manufacturing overhead $162,000 Fixed selling and administrative expenses $80,000

The company computes its predetermined fixed manufacturing overhead absorption rate annually based on its direct labor cost. During the year, 28,000 units were made and 24,000 units were sold at the estimated selling price. Actual costs were incurred on the same basis as the estimated cost structure.

Required:

(a) Calculate the amount of underapplied or overapplied fixed manufacturing overhead for the year. (3 marks)

(b) Assume the company’s underapplied or overapplied overhead is closed to the Cost of Goods Sold. Prepare an income statement for the year ended 31 December 2021 using absorption costing. 

(c) Prepare an income statement for the year ended 31 December 2021 using variable costing.

(d) Explain the reason for any difference in the ending inventory balances under the two costing methods and the impact of this difference on reported net operating profits in (b) and (c).

(e) Assume that the company wishes to prepare the financial statements for its shareholders, How much should be reported in the Finished Goods inventory account? Explain. 

(f) Assume the company wants to use absorption cost-plus pricing the set the new selling price for the product next year with the same budgeted production and sales volume at 30,000 units, what would be the revised selling price if the company’s required rate of return on the initial investment of $1,372,000 is 10%? How might the customers react to the new price?