Outback, Ltd., manufactures tactical LED flashlights in Melbourne, Australia. Th
ID: 2584876 • Letter: O
Question
Outback, Ltd., manufactures tactical LED flashlights in Melbourne, Australia. The firm uses an absorption-costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding planned and actual operations for 20x4 follow:
Budgeted Costs
Per Unit
Total
Actual Costs
Direct material
$
12.20
$
1,634,800
$
1,512,800
Direct labor
9.30
1,246,200
1,153,200
Variable manufacturing overhead
4.30
576,200
533,200
Fixed manufacturing overhead
4.50
603,000
613,000
Variable selling expenses
7.50
1,005,000
877,500
Fixed selling expenses
7.80
1,045,200
1,045,200
Variable administrative expenses
2.80
375,200
327,600
Fixed administrative expenses
2.80
375,200
384,200
Total
$
51.20
$
6,860,800
$
6,446,700
Planned Activity
Actual Activity
Sales in units
134,000
117,000
Production in units
134,000
124,000
Beginning finished-goods inventory in units
43,000
43,000
The budgeted per-unit cost figures were based on the company producing and selling 134,000 units in 20x4. Outback uses a predetermined overhead rate for applying manufacturing overhead to its product. A total manufacturing overhead rate of $8.80 per unit was employed for absorption costing purposes in 20x4. Any overapplied or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the year. The 20x4 beginning finished-goods inventory for absorption costing purposes was valued at the 20x3 budgeted unit manufacturing cost, which was the same as the 20x4 budgeted unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price for 20x4 was $72.00 per unit.
Required:
1.
Compute the value of Outback’s 20x4 ending finished-goods inventory under absorption costing. (Do not round intermediate calculations.)
2.
Compute the value of Outback’s 20x4 ending finished-goods inventory under variable costing. (Do not round intermediate calculations.)
3.
Compute the difference between Outback’s 20x4 reported operating income calculated under absorption costing and calculated under variable costing. (Do not round intermediate calculations.)
Explanation / Answer
Solution:
Part 1 -- The value of Outback’s 20x4 ending finished-goods inventory under absorption costing
Absorption Costing System
- Product Cost refers to the costs used to fabricate/make/produce a product.
- Under Absorption Costing, product cost includes both fixed and variable manufacturing expenses incurred in fabrication of the product or service.
- It includes cost of direct material used, cost of direct labor, consumable supplies used and manufacturing/factory overheads (both variable as well as fixed factory overhead).
- Ending Inventory is valued on Production Cost.
- Product Cost does not include Selling, General and Administrative Expenses.
Calculation of Unit Product Cost or Unit Manufacturing Cost under Absorption Costing
Per Unit
Direct Material
$12.20
Direct labor
$9.30
Variable manufacturing overhead
$4.30
Fixed manufacturing overhead
$4.50
Product Cost per unit
$30.30
Calculation of Units in Ending Inventory (Actual Activity Level)
Units of Ending Inventory = Beginning Finished Goods + Production during the year – Sales Units
= 43,000 + 124,000 – 117,000
= 50,000 Units
Value of Ending Inventory Under Absorption Costing = Ending Inventory Units x Unit Product Cost
= 50,000 Units x $30.3
= $1,515,000
Part 2 -- the value of Outback’s 20x4 ending finished-goods inventory under variable costing
Variable Costing System
1) Product Cost refers to the costs used to fabricate/make/produce a product.
2) Under Variable Costing System, product cost includes only following variable manufacturing costs:
- Cost of direct material used
- Direct labor cost
- Variable manufacturing overheads.
3) Under this system, fixed costs are not considered in product cost and for valuation of closing stock of finished goods. Fixed costs are treated as period cost in this system.
4) The value of finished goods and work in process is also comprised only of Manufacturing Variable Costs.
5) Selling and administrative expenses are not included because these are not the expenses incurred in production department. These expenses relate to selling and admin department.
Calculation of Unit Product Cost or Unit Manufacturing Cost under Variable Costing System
Per Unit
Direct Material
$12.20
Direct labor
$9.30
Variable manufacturing overhead
$4.30
Product Cost per unit
$25.80
Value of Ending Inventory = 50,000 Units x Unit Product Cost as per Variable Costing $25.80 = $1,290,000
Part 3 -- the difference between Outback’s 20x4 reported operating income calculated under absorption costing and calculated under variable costing
The difference in reporting income occurred because of different treatment of Fixed Manufacturing Overhead under both the method. Absorption Costing include fixed manufacturing overhead in product cost whereas Variable Costing System does not include. So, the different will be due to fixed manufacturing overhead.
We need to prepare the Income Statement based on both method
Income Statement as per Absorption Costing
Absorption Costing Income Statement
$$
Sales Revenue (117,000 Units x $72)
$8,424,000
Cost of Goods Manufactured (Produced Units 124,000 Units x Product Cost $30.30)
$3,757,200
Add: Beginning Inventory (43,000 Units x 30.30)
$1,302,900
Cost of Goods Available for Sale
$5,060,100
Less: Ending Inventory Value (as per part 1)
-$1,515,000
Cost of goods sold
$3,545,100
Gross Profit (Sales - COGS)
$4,878,900
Selling and administrative expenses:
Variable selling Expense (117,000 Units x 4.50)
$526,500
Variable administrative expense (117,000 Units x 2.80)
$327,600
Fixed selling expenses
$1,045,200
Fixed administrative expenses
$375,200
Total Selling and administrative expenses
$2,274,500
Net Operating Income
$2,604,400
Variable Costing Income Statement
Variable Costing Income Statement
$$
Sales Revenue (117,000 Units x $72)
$8,424,000
Cost of Goods Manufactured (Produced Units 124,000 Units x Product Cost $25.80))
$3,199,200
Add: Beginning Inventory (43,000 Units x 25.8)
$1,109,400
Cost of Goods Available for Sale
$4,308,600
Less: Ending Inventory Value (as per part 1)
-$1,290,000
Variable Cost of goods sold
$3,018,600
Add: Variable Selling and Administrative Expenses:
Variable selling Expense (117,000 Units x 4.50)
$526,500
Variable administrative expense (117,000 Units x 2.80)
$327,600
Total Variable Cost
$3,872,700
Contribution Margin (Sales - Variable Cost)
$4,551,300
Fixed Selling and administrative expenses:
Fixed selling expenses
$1,045,200
Fixed administrative expenses
$375,200
Total Fixed Selling and administrative expenses
$1,420,400
Net Operating Income
$3,130,900
The difference between Profit as per Absorption Costing and Variable Costing = 3,130,900 - 2,604,400 = $526,500
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Per Unit
Direct Material
$12.20
Direct labor
$9.30
Variable manufacturing overhead
$4.30
Fixed manufacturing overhead
$4.50
Product Cost per unit
$30.30
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