Skinny Dippers, Inc. produces nonfat frozen yogurt. The product is sold in five-

Question

Skinny Dippers, Inc. produces nonfat frozen yogurt. The product is sold in five-gallon containers, which
have the following price and variable costs.

Sales price ......................................................................................................................................................... $15
Direct material .................................................................................................................................................. 5
Direct labor ....................................................................................................................................................... 2
Variable overhead ............................................................................................................................................ 3

Budgeted fixed overhead in 20x1, the company’s first year of operations, was $300,000. Actual production
was 150,000 five-gallon containers, of which 125,000 were sold. Skinny Dippers, Inc. incurred the
following selling and administrative expenses.

Fixed ..................................................................................................................................... $50,000 for the year
Variable ............................................................................................................................... $1 per container sold

ISBN 978-1-259-56956-2

Problems All applicable Problems are avallable in Connect. Skinny Dippers, Inc. produces nonfat frozen yogurt. The product is sold in five-gallon containers, which have the following price and variable costs $15 Sales price Direct material Direct labor Variable overhead Budgeted fixed overhead in 20x1, the company's first year of operations, was $300,000. Actual produc- tion was 150,000 five-gallon containers, of which 125,000 were sold. Skinny Dippers, Inc. incurred the following selling and administrative expenses. Fixed Variable $50,000 for the year $1 per container sold Required 1. Compute the product cost per container of frozen yogurt under (a) variable costing and (b) absorp- tion costing Prepare operating income statements for 20x1 using (a) absorption costing and (b) variable costing Reconcile the operating income reported under the two methods by listing the two key places where the income statements differ Reconcile the operating income reported under the two methods using the shortcut method Build a spreadsheet: Construct an Excel spreadsheet to solve all of the preceding requirements Show how the solution will change if the following information changes: the selling price and direct-material cost per unit are $16.00 and $4.50, respectively 2. 3. 4. 5.

Explanation / Answer

Answer 1 Product cost per container of frozen yogurt Variable Costing Absorption costing Direct Material $5.00 $5.00 Direct Labour $2.00 $2.00 Variable Manufacturing Overhead $3.00 $3.00 Fixed Manufacturing Overhead $2.00 Product cost per container of frozen yogurt $10.00 $12.00 Fixed manufacturing overhead per container = Budgeted Fixed manufacturing overheads / Production in no.of containers Fixed manufacturing overhead per container = $300000/150000 containers = $2 per container Answer 2 Operating Income statement for 2001 using Variable Costing Operating Income Statement for 2001 using Absorption Costing Sales [125000 units * $15] $1,875,000.00 Sales [125000 units * $15] $1,875,000.00 Less : Variable cost Less : Product cost [125000 units * $12] $1,500,000.00 - Product cost [125000 units * $10] $1,250,000.00 Gross Margin $375,000.00 - Selling and administrative [125000 units * $1] $125,000.00 Less : Selling and administrative exp. Contribution Margin $500,000.00 - Fixed $50,000.00 Less : Fixed Costs - Variable $125,000.00 - Manufacturing Overheads $300,000.00 Net Operating Income $200,000.00 - Selling and administrative expenses $50,000.00 Net Operating Income $150,000.00 Answer 3 Reconciliation of operating Income reported under two methods. Net Operating income as per absorption costing $200,000.00 Less : Fixed Overhead component included in ending inventory deferred $50,000.00 Add: Fixed overhead component included in beginning Inventory 0 Net Operating income as per Variable costing $150,000.00 Answer 5 Operating Income statement for 2001 using Variable Costing Operating Income Statement for 2001 using Absorption Costing Sales [125000 units * $16] $2,000,000.00 Sales [125000 units * $16] $2,000,000.00 Less : Variable cost Less : Product cost [125000 units * $11.50] $1,437,500.00 - Product cost [125000 units * $9.50] $1,187,500.00 Gross Margin $562,500.00 - Selling and administrative [125000 units * $1] $125,000.00 Less : Selling and administrative exp. Contribution Margin $687,500.00 - Fixed $50,000.00 Less : Fixed Costs - Variable $125,000.00 - Manufacturing Overheads $300,000.00 Net Operating Income $387,500.00 - Selling and administrative expenses $50,000.00 Net Operating Income $337,500.00

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