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. @ 1.30) $3.90 Direct labor (0.4 hr. @ 14.50) 5.80 Variable overhead (0.4 hr. @ 5.00) 2.00 Fixed overhead (0.4 hr. @ 7.00) 2.80 Total $14.50 Selling and administrative costs: Variable $1.60 per unit Fixed $217,000 During the year, the company had the following activity: Units produced 27,000 Units sold 24,300 Unit selling price $36 Direct labor hours worked 10,800 Actual fixed overhead was $12,400 less than budgeted fixed overhead. Budgeted variable overhead was $5,100 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: 1. Compute the unit cost using (a) absorption costing and (b) variable costing. Unit Cost Absorption costing $___ Variable costing $_ 2. Prepare an absorption-costing income statement. Round your answers to the nearest cent. Flaherty, Inc.Absorption-Costing Income StatementFor the First Year of Operations Sales $___ Cost of goods sold $_ Less: Overapplied overhead ___ Gross profit $ Less: Selling and administrative expenses _ Operating income $_

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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. @ 1.30)	$3.90
Direct labor (0.4 hr. @ 14.50)	5.80
Variable overhead (0.4 hr. @ 5.00)	2.00
Fixed overhead (0.4 hr. @ 7.00)	2.80
Total	$14.50
Selling and administrative costs:
Variable	$1.60 per unit
Fixed	$217,000

During the year, the company had the following activity:

Units produced	27,000
Units sold	24,300
Unit selling price	$36
Direct labor hours worked	10,800

Actual fixed overhead was $12,400 less than budgeted fixed overhead. Budgeted variable overhead was $5,100 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:

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

Unit Cost
Absorption costing	$_____
Variable costing	$_____

2. Prepare an absorption-costing income statement. Round your answers to the nearest cent.

Flaherty, Inc.Absorption-Costing Income StatementFor the First Year of Operations

Sales		$_______
Cost of goods sold	$_____
Less:
Overapplied overhead	_________	________
Gross profit		$______
Less: Selling and administrative expenses		_______
Operating income		$_____

3. Prepare a variable-costing income statement. Round your answers to the nearest cent.

Flaherty, Inc.Variable-Costing Income StatementFor the First Year of Operations

Sales		$_____
Variable cost of goods sold	$_________
Add:
Underapplied variable overhead	________	________
Variable selling expense		_________
Contribution margin		$_________
Less:
Fixed factory overhead	$_________
Selling and administrative expenses	_______	$_______
Operating income		$_________

4. Reconcile the difference between the two income statements.
The absorption costing generates an income $_______ more than variable costing.

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