Exercise 18.15 Absorption and Variable Costing with Over- and Underapplied Overh
ID: 2479035 • Letter: E
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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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.
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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Absorption costing assigns all manufacturing costs to each unit produced.
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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Use a contribution margin format income statement that groups costs according to behavior (variable and fixed)
4. Reconcile the difference between the two income statements.
The absorption costing generates an income $ - Select your answer -higherlowerCorrect 2 of Item 4 than variable costing.
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IA – IV = Fixed overhead rate × (Production – Sales)
Unit Cost Absorption costing $ Variable costing $Explanation / Answer
1.
Unit cost using (a) absorption costing and (b) variable costing is calculated as under:
$18 per unit
2.
Absorption Costing Income statement is prepared as under:
3.
Variable costing income statement is prepared as under:
4.
Absorption costing generates an income of $12,150 higher than that generated through variable costing.
This difference is because of the fixed cost.
Unit Cost Absorption costing $22.5 per unit Variable costing$18 per unit
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