Blackstone Tools produced 12,000 electric drills during 20X4. Expected productio
ID: 2436166 • Letter: B
Question
Blackstone Tools produced 12,000 electric drills during 20X4. Expected production was only 10,500 drills. The company’s fixed-overhead rate is $7 per drill. Absorption-costing operating income for the year is $18,000, based on sales of 11,000 drills.1. Compute
a. Budgeted fixed overhead
b. Production-volume variance
c. Variable-costing operating income
2. Reconcile absorption-costing operating income and variable-costing operating income.Include the amount of the difference between the two and an explanation for the difference.
Explanation / Answer
1. Compute
a. Budgeted fixed overhead
= 10,500 drills x $7.00 = $73,500
b. Production-volume variance
= (Actual Production - Budgeted production) x Standard rate
= (12,000 drills - 10,500 drills) x $7.00 = $10,500 Favorable
c. Variable-costing operating income
Operating Income Under Absorption Costing $18,000
Less : Fixed Cost difference
(12,000 drills - 11,000) x $7.00 $7,000
Operating Income under Variable Costing $11,000
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2. Reconcile absorption-costing operating income and variable-costing operating income.Include the amount of the difference between the two and an explanation for the difference.
Fixed cost charged under Variable costing 10,500 x $7.00 $73,500
Fixed cost charged under Absorption Costing
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In Cost of Goods sold 11,000 x $7.00 $77,000
Less : Production Volume variance ($10,500)
$66,500
Difference in fixed cost $7,000
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Due to difference in fixed cost under the two methods, operating Income differs by $7,000 i.e. absorption costing method reports $18,000 whereas Variable costing method reports $11,000.
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