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 (3 lbs. @ 1.40)	$4.20
Direct labor (0.4 hr. @ 16.00)	6.40
Variable overhead (0.4 hr. @ 4.00)	1.60
Fixed overhead (0.4 hr. @ 6.00)	2.40
Total	$14.60
Selling and administrative costs:
Variable	$1.80	per unit
Fixed	$217,500

During the year, the company had the following activity:

Units produced	27,000
Units sold	24,300
Unit selling price	$38
Direct labor hours worked	10,800

Actual fixed overhead was $11,000 less than budgeted fixed overhead. Budgeted variable overhead was $4,100 less than the actual variable overhead. The company used an expected actual activity level of 10,800 direct labor hours to compute the predetermined overhead rates. Any overhead variances are closed to Cost of Goods Sold.

Required:

Question Content Area

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

	Unit Cost
Absorption costing	$fill in the blank bf35d003afb6f97_1
Variable costing	$fill in the blank bf35d003afb6f97_2

Question Content Area

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 expenses		$- Select -
Cost of goods soldSalesSelling and administrative expensesUnderapplied overhead	$- Select -
Less:
Overapplied overheadSalesSelling and administrative expensesUnderapplied overhead	- Select -	- Select -
Gross profit		$fill in the blank b9dbed0c9fb4fed_8
Less: Cost of goods soldLess: Overapplied overheadLess: SalesLess: Selling and administrative expenses		- Select -
Operating income		$fill in the blank b9dbed0c9fb4fed_11

Question Content Area

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 expense		$- Select -
Fixed factory overheadOverapplied variable overheadSalesVariable cost of goods sold	$- Select -
Add:
Fixed factory overheadOverapplied variable overheadSelling and administrative expensesUnderapplied variable overhead	- Select -	- Select -
Fixed factory overheadSelling and administrative expensesOverapplied variable overheadVariable selling expense		- Select -
Contribution margin		$fill in the blank c52186035038fae_10
Less:
Fixed factory overheadUnderapplied variable overheadVariable cost of goods soldVariable selling expense	$- Select -
Selling and administrative expensesUnderapplied variable overheadVariable cost of goods soldVariable selling expense	- Select -	$- Select -
Operating income		$fill in the blank c52186035038fae_16

Question Content Area

4. Reconcile the difference between the two income statements. The absorption costing generates an income $fill in the blank fd140b07d03c063_1

moreless

than variable costing