Question

Great Outdoze Company manufactures sleeping bags, which sell for $65.60 each. The variable costs of production are as follows:

Direct material	$	19.60
Direct labor		10.20
Variable manufacturing overhead		6.90

Budgeted fixed overhead in 20x1 was $151,800 and budgeted production was 22,000 sleeping bags. The year’s actual production was 22,000 units, of which 18,400 were sold. Variable selling and administrative costs were $1.70 per unit sold; fixed selling and administrative costs were $27,000.

Required:

1. Calculate the product cost per sleeping bag under (a) absorption costing and (b) variable costing.

2-a. Prepare operating income statements for the year using absorption costing.

2-b. Prepare operating income statements for the year using variable costing.

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

Answer 1

Answer 1.

Absorption Costing:

Product Cost per sleeping bag = Direct Materials per sleeping bag + Direct Labor per sleeping bag + Variable Manufacturing Overhead per sleeping bag + Fixed Manufacturing Overhead per sleeping bag
Product Cost per sleeping bag = $19.60 + $10.20 + $6.90 + $151,800/22,000
Product Cost per sleeping bag = $43.60

Variable Costing:

Product Cost per sleeping bag = Direct Materials per sleeping bag + Direct Labor per sleeping bag + Variable Manufacturing Overhead per sleeping bag
Product Cost per sleeping bag = $19.60 + $10.20 + $6.90
Product Cost per sleeping bag = $36.70

Answer 2-a.

Answer 2-b.

Answer 3.