Question

PlayCraft Co. manufactures toy boats. During 2019, total costs incurred in making 54,000 toy boats included $189,000 of fixed manufacturing overhead. The total absorption cost per toy boat was $28.50.

(a.) Calculate the variable cost per toy boat.
(b.) The ending inventory of toy boats was 11,600 units higher at the end of 2019 than at the beginning of the year. By how much and in what direction (higher or lower) would cost of goods sold for 2019 be different under direct costing than under variable costing?
(c.) Express the toy boat cost in a cost formula. What does this formula suggest the total cost of making an additional 5,800 toy boats would be?

Answer 1

Fixed manufacturing Overhead per boat = 189,000/54,000

= $3.5

a.Variable cost per toy boat = Total cost – Fixed manufacturing cost

= 28.50-3.50

= $25

b.Since inventory has increased, Cost of goods sold will be lower by 11,600*3.50 = $40,600 in direct costing than variable costing since fixed manufacturing overhead is charged as period cost under variable costing

c.Cost = 25x + 189,000

Cost of making additional 5,800 boats = 5,800*25

= $145,000

Since fixed costs will not increase