Chapter 9, Problem 9.44P

Variable and absorption costing, actual costing. The Iron City Company started business on January 1, 2017. Iron City manufactures a specialty honey beer, which it sells directly to state-owned distributors in Pennsylvania. Honey beer is produced and sold in six-packs, and in 2017, Iron City produced more six-packs than it was able to sell. In addition to variable and fixed manufacturing overhead, Iron City incurred direct materials costs of $880,000, direct manufacturing labor costs of $400,000, and fixed marketing and administrative costs of $295,000 For the year Iron City sold a total of 180,000 six-parks for a sales revenue of $2,250,000.

Iron City’s CFO is convinced that the firm should use an actual costing system but is debating whether to follow variable or absorption costing. The controller notes that Iron City’s operating income for the year would be $438,000 under variable costing and $461,000 under absorption costing. Moreover the ending finished-goods inventory would be valued at $7.15 under variable costing and $8.30 under absorption costing.

Iron City incurs no variable nonmanufacturing expenses.

1. 1. What is Iron City’s total contribution margin for 2017?
2. 2. Iron City incurs fixed manufacturing costs in addition to its fixed marketing and administrative costs. How much did Iron City incur in fixed manufacturing costs in 2017?
3. 3. How many six-packs did Iron City produce in 2017?
4. 4. How much in variable manufacturing overhead did Iron City incur in 2017?
5. 5. For 2017, how much in total manufacturing overhead is expensed under variable costing, either through cost of goods sold or as a period expense?