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$)$:$$Direct materials $(2$ lbs$.$ @ $1\mathrm{.}35)$$$2\mathrm{.}70$Direct labor $(0\mathrm{.}4$ hr$.$ @ $16\mathrm{.}50)6\mathrm{.}60$Variable overhead $(0\mathrm{.}4$ hr$.$ @ $4\mathrm{.}00)1\mathrm{.}60$Fixed overhead $(0\mathrm{.}4$ hr$.$ @ $7\mathrm{.}00)2\mathrm{.}80$Total$$13\mathrm{.}70$Selling and administrative costs:$$Variable$$1\mathrm{.}80$per unit$$Fixed$$216,500$

During the year, the company had the following activity:

Units produced$26,500$Units sold$23,850$Unit selling price$$35$Direct labor hours worked$10,600$

Actual fixed overhead was $$11,600$ less than budgeted fixed overhead. Budgeted variable overhead was $$5,900$ 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:

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$1.$ Compute the unit cost using $($a$)$ absorption costing and $($b$)$ variable costing.

$$Unit CostAbsorption costing$fill in the blank $302$ffb$084058028\_1$Variable costing$fill in the blank $302$ffb$084058028\_2$

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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

Cost of goods soldOverapplied overheadSalesSelling and administrative expensesSales

blank$Sales

Cost of goods soldSalesSelling and administrative expensesUnderapplied overheadCost of goods sold

$Cost of goods soldblankLess:blankblank

Overapplied overheadSalesSelling and administrative expensesUnderapplied overheadOverapplied overhead

Overapplied overheadOverapplied overheadGross profitblank$fill in the blank af$562$a$03$a$046064\_8$

Less: Cost of goods soldLess: Overapplied overheadLess: SalesLess: Selling and administrative expensesLess: Selling and administrative expenses

blankLess: Selling and administrative expensesOperating incomeblank$fill in the blank af$562$a$03$a$046064\_11$

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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

Fixed factory overheadSalesSelling and administrative expensesVariable selling expenseSales

blank$Sales

Fixed factory overheadOverapplied variable overheadSalesVariable cost of goods soldVariable cost of goods sold

$Variable cost of goods soldblankAdd:blankblank

Fixed factory overheadOverapplied variable overheadSelling and administrative expensesUnderapplied variable overheadUnderapplied variable overhead

Underapplied variable overheadUnderapplied variable overhead

Fixed factory overheadSelling and administrative expensesOverapplied variable overheadVariable selling expenseVariable selling expense

blankVariable selling expenseContribution marginblank$fill in the blank $9611$f$0$fcc$059$feb$\_10$Less:blankblank

Fixed factory overheadUnderapplied variable overheadVariable cost of goods soldVariable selling expenseFixed factory overhead

$Fixed factory overheadblank

Selling and administrative expensesUnderapplied variable overheadVariable cost of goods soldVariable selling expenseSelling and administrative expenses

Selling and administrative expenses$Selling and administrative expensesOperating incomeblank$fill in the blank $9611$f$0$fcc$059$feb$\_16$

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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 b$3$e$377$fbdfe$507$d$\_1$

morelessmore

than variable costing.

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IA $$ IV $=$ Fixed overhead rate $($Production $$ Sales$)$

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Partially correct