Exercise 18.15 Absorption and Variable Costing with Over- and Underapplied Overh

Question

Exercise 18.15
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:

    Actual fixed overhead was $12,000 less than budgeted fixed overhead. Budgeted variable overhead was $5,000 less than the actual variable overhead. The company used an expected actual activity level of 12,000 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. Round your answers to the nearest cent.

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2. Prepare an absorption-costing income statement.

Flaherty, Inc.

Absorption-Costing Income Statement

For the First Year of Operations

$

Less:

$

Gross profit

$

Operating income

$

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3. Prepare a variable-costing income statement.

Flaherty, Inc.

Variable-Costing Income Statement

For the First Year of Operations

$

Less:

$

Contribution margin

$

Less:

$

$

Operating income

$

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4. Reconcile the difference between the two income statements.
The absorption costing generates an income $

than variable costing.

Explanation / Answer

Exercise 18.15 Absorption and Variable Costing with Over- and Underapplied Overh

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