Variable Costing, Absorption Costing During its first year of operations, Snobeg

Question

Variable Costing, Absorption Costing During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,000 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,200 scoops. Fixed overhead was applied at $0.75 per unit produced. Fixed overhead was underapplied by $2,900. This fixed overhead variance was closed to Cost of Goods Sold. There was no variable overhead variance. The results of the year’s operations are as follows (on an absorption-costing basis): Required: 1. Calculate the cost of the firm’s ending inventory under absorption costing. Round unit cost to the five decimal places. Round your final answer to the nearest dollar. $ What is the cost of the ending inventory under variable costing? Round unit cost to five decimal places. Round your final answer to the nearest dollar.

Explanation / Answer

1. No. of Units of closing inventory = 40000 - 38200 = 1800 scoops

Fixed overhead rate per scoop of inventory = $0.75 per scoop

Cost of ending inventory under absorption costing = 1800x0.75

= $1350

2. Cost of ending inventory under variable costing = Cost of ending inventory under absorption costing + Fixed overhead underapplied

= 1350+ [2900/40000 x 1800]

= $1480.50

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