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. units sold= 125000

Fixed $ 50,000 for the year

Variable $ 1 per container sold

1. Compute the product cost per container of frozen yogurt under (a) variable
costing and (b) absorption costing.
pre-determined fixed OH rate= Budgeted Fixed OH / Budgeted Production
OH bud $ 300,000
Bud Production 150000 units $ 2 per unit

Direct Material $ 5
Direct Labor $ 2
Variable OH $ 3
a. cost/unit under VARIABLE COSTING $ 10
Fixed OH per unit under Absorbtion $ 2
b. cost/unit under ABSORBTION COSTING $ 12

2-a. Prepare operating income statements for 20x1 using absorption costing.
Sales Revenue 125000 units at $15 $ 1,875,000
Cost of Goods Sold 125000 at $12 $ 1,500,000
Gross Margin $ 375,000
Selling & Admin
Variable 125000 at $1 $ 125,000
Fixed $ 50,000
Operating Income $ 200,000

2-b. Prepare operating income statements for 20x1 using variable costing.
Sales Revenue 125000 units at $15 $ 1,875,000
Variable Expenses:
Variable Mfg 125000 at $10 $ 1,250,000
Variable Selling a 125000 at $1 $ 125,000
Contribution Margin $ 500,000
Fixed Exps
Fixed mfg OH $ 300,000
Fixed selling & Admin $ 50,000
Operating Income $ 150,000

3. Reconcile the operating income reported under the two methods by listing the
two key places where the income statements differ.

Cost of goods sold under absorption costing $ 1,500,000

Variable manufacturing costs under variable costing 1,250,000
Subtotal $ 250,000
Fixed manufacturing overhead as period expense under 300,000
Total $ (50,000)

Operating income under variable costing $ 150,000

Less: Operating income under absorption costing 200,000
Difference in operating income $ (50,000)

4. Reconcile the operating income reported under the two methods using the
shortcut method.
Difference = Difference in fixed overhead expensed under absorption and variable costing
= (change in inventory, in units) × (predetermined fixed overhead rate per unit)
units produced 150,000
units sold 125,000
= 25,000 $ 2 $ 50,000
As shown in requirement (2), reported operating income is $50,000 lower under variable costing.
Great Outdoze Company manufactures sleeping bags, which sell for $65 each. The
variable costs of production are as follows:

Direct material $ 20
Direct labor $ 11
Variable manufacturi $ 8
bud fixed OH= 200000
Budgeted fixed overhead in 20x1 was $200,000 and budgeted production was
25,000 sleeping bags. The year’s actual production was 25,000 units, of which units produ 25000
22,000 were sold. Variable selling and administrative costs were $1 per unit sold;
fixed selling and administrative costs were $30,000
fixed selling & admin 30000
1. Calculate the product cost per sleeping bag under (a) absorption costing and (b) variable costing.
Absorbtion Variable
Direct Materials $ 20 $ 20
Direct Labor $ 11 $ 11
Manufacturing OH
Variable $ 8 $ 8
Fixed 8
Total absorbtion cost / unit $ 47
Total Variable cost / unit $ 39

2-a. Prepare operating income statements for the year using absorption costing.
Sales Reveune
per unit 65
sold 22000 $ 1,430,000

CGS absorbtion $ 47 $ 1,034,000

Gross Margin $ 396,000
Selling & Admins
Variable seper unit $ 1.00 $ 22,000
Fixed Selling & Admin $ 1.36 $ 30,000
Operating Income $ 344,000

2-b. Prepare operating income statements for the year using variable costing.
Sales Reveune
per unit 65
sold 22000 $ 1,430,000

CGS absorbtion $ 39 $ 858,000

Variable selling & Admin
per unit $ 1.00 $ 22,000
Contribution Margin $ 550,000
Fixed Manufacturing OH $ 200,000
 Fixed Selling & Admin $ 30,000
Operating Income $ 320,000

3. Reconcile reported operating income under the two methods using the shortcut method.

Change in inventory (i× Predetermined fixe= Absorption-costing income minus variable-costing income
3,000 unit increa× $8 = $24,000
us variable-costing income
Emerson Corporation just completed its first year of operations. Planned and
actual production equaled 10,000 units, and sales totaled 9,600 units at $72 per
unit. Cost data for the year are as follows:

Direct material (per unit) $ 12

Conversion cost:
Direct labor $ 45,000
Variable manufacturing overhead $ 65,000
Fixed manufacturing overhead $ 220,000
Selling and administrative costs:
Variable (per unit) $ 8
Fixed $ 118,000

1. Compute the company’s total cost for the year assuming that variable
manufacturing costs are driven by the number of units produced, and variable selling
and administrative costs are driven by the number of units sold.

Direct Materials
units 10,000
caost/ $ 12 $ 120,000
Direct Labor $ 45,000
Variable Mfg OH $ 65,000
Fixed manufacturing overhead $ 220,000
Selling and administrative costs:
Variable (per unit) 9600 $ 76,800
Fixed $ 118,000
Total $ 644,800

2. How much of this cost would be held in year-end inventory under (a) absorption
costing and (b) variable costing?
Direct Materials
units 10,000
caost/ $ 12 $ 120,000
Direct Labor $ 45,000
Variable Mfg OH $ 65,000
Fixed manufacturing overhead $ 220,000
Total Product Cost $ 450,000
Cost/unit $ 45
Year end Inventory
unit produced 10,000
units sold 9,600
ending inventory 400
$ 18,000 Absorption Costing
 ending inventory 18,000 Variable Costing - NEED TO FINISH

3. How much of the company’s total cost for the year would be included as an expense
on the period’s income statement under (a) absorption costing and (b) variable
costing?
The total costs would be allocated between the current period’s income
statement and the year-end inventory on the balance sheet. Thus:
Absorption costing: $644,800 – $18,000 = $626,800

Variable costing: $644,800 – $9,200 = $635,600

Alternatively, these amounts can be derived as follows:

Absorption Costing Variable Costing

Cost of goods sold:
9,600 units × $45 432,000
9,600 units × $23 220,800
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead 220,000
Variable selling and administrative c 76,800 76,800
Fixed selling and administrative cost 118,000 118,000
Total 626,800 635,600
Information taken from Horner Corporation's May accounting records follows:

Direct materials used $ 206,000

Direct labor $ 83,000
Variable manufacturing overhead $ 33,000
Fixed manufacturing overhead $ 138,000
Variable selling and administrative costs $ 54,000
Fixed selling and administrative costs $ 63,000
Sales revenues $ 640,000

A. Assuming the use of variable costing, compute the inventoriable costs for the month.
Direct materials used $ 206,000
Direct labor $ 83,000
Variable manufacturing overhead $ 33,000
Total $ 322,000

B. Compute the month's inventoriable costs by using absorption costing.

Direct materials used $ 206,000
Direct labor $ 83,000
Variable manufacturing overhead $ 33,000
Fixed Manufacturing OH $ 138,000
Total $ 460,000

C. Assume that anticipated and actual production totaled 23,000 units, and
that 19,500 units were sold during May. Determine the amount of fixed
manufacturing overhead and fixed selling and administrative costs that would
be expensed for the month under (1) variable costing and (2) absorption costing.

Fixed manufacturing overhead: $ 138,000

Fixed selling and administrative costs: $ 63,000

Fixed manufacturing overhead: ($138,000 ÷ 23,000 units) × 19,500 units = $117,000

$ 138,000 23,000 $ 19,500 $ 117,000
Fixed selling and administrative costs: $63,000 $ 63,000

D. Assume the same data as in requirement "C." Compute the contribution

margin that would be reported on a variable-costing income statement.

Variable manufacturing costs: $206,000 + $83,000 + $33,000 = $322,000

$ 206,000 $ 83,000 $ 33,000 $ 322,000
Variable manufacturing costs per unit: $322,000 ÷ 23,000 units = $14
$ 322,000 23,000 14
Contribution margin: $640,000 − [(19,500 × $14) + $54,000] = $313,000
$ 640,000 $ 273,000 $ 54,000 $ 313,000
The following data relate to Santa Mia, Inc., a new company:

Planned and actual production 230,000 units

Sales at $50 per unit $ 50.00 188,000 units
Manufacturing costs:
Variable $ 20 per unit
Fixed $ 1,035,000
Selling and administrative costs:
Variable $ 7 per unit
Fixed $ 931,000

There were no variances during the period.

A. Determine the number of units in the ending finished-goods inventory.

Inventory Beginning 0 units
production 230,000 units
sales 188000 units
Inventory, ending 42,000

B. Calculate the cost of the ending finished-goods inventory under (1) variable costing
and (2) absorption costing.
Ending Inventory 42,000 units
Variable cost/unit $ 20
Variable Costing $ 840,000

Fixed OH $ 1,035,000
production 230,000 units
Fixed Oh/unit $ 4.50

Ending Inventory 42,000 units

Variable cost/unit $ 20
Fixed Oh/unit $ 4.50
Absorption Costing $ 1,029,000
C. Determine the company's variable-costing income.

Sales revenues (188,000 units × $50) 9,400,000

Less: Variable costs [188,000 units × ($205,076,000
+ $7)]
Contribution margin 4,324,000
Less: Fixed costs ($1,035,000 + 1,966,000
Income 2,358,000
D. Determine the company's absorption-costing income.

Sales revenues (188,000 units × $50) 9,400,000

Less: Cost of goods sold [188,000 units × 4,606,000
($20 + $4.50)]
Gross Margin 4,794,000
Less: Operating costs [(188,000 units × $7)
1,316,000
+ $931,000]
Fixed Selling & Admin 931,000 2,247,000
Income 2,547,000
Carrington, Inc. began business at the start of the current year and
maintains its accounting records on an absorption-cost basis. The
following selected information appeared on the company's income
statement and end-of-year balance sheet:

Income Statement data:

Sales revenues (60,000 units × $16) $ 960,000 60000 units @ $16
Gross margin $ 300,000
Total sales and administrative expenses $ 174,000
Balance sheet data:
Ending finished goods inventory (12,000 units) $ 132,000 12000 units @ $ 11

Carrington achieved its planned production level for the year. The
company's fixed manufacturing overhead totaled $288,000, and the
firm paid a 10% commission based on gross sales dollars to its sales
force.

A. How many units did Carrington plan to produce during the year?
Sales 60000
ing finished good inv 12000
Total Units Produced 72000

B. How much fixed manufacturing overhead did the company apply to each unit produced?
Fixed Mfg OH 288000
Total Units Produced 72000
Fixed Mfg OH/unit $ 4.00
C. Compute Carrington’s cost of goods sold. OR by using finished goods inventory
Cost of Goods Sold $ 660,000 Ending Fin Goods $ 132,000
Fixed cost in CGS $ 240,000 Fixed cost $ 48,000
Variable CGS $ 420,000 Variable CGS $ 84,000
Variable CGS/unit $ 7.00 Variable CGS/unit $ 7.00

D. How much variable cost did the company attach to each unit manufactured?