Question

Skinny Dippers, Inc. produces nonfat frozen yogurt. The product is sold in ten-gallon containers, which have the following price and variable costs.

Sales price	$	30
Direct material		11
Direct labor		4
Variable overhead		6

Budgeted fixed overhead in 20x1, the company’s first year of operations, was $640,000. Actual production was 160,000 ten-gallon containers, of which 152,000 were sold. Skinny Dippers, Inc. incurred the following selling and administrative expenses.

Fixed	$	160,000		for the year
Variable	$	1		per container sold

Required:

1. 1. Compute the product cost per container of frozen yogurt under (a) variable costing and (b) absorption costing.

2. 2-a. Prepare operating income statements for 20x1 using absorption costing.

3. 2-b. Prepare operating income statements for 20x1 using variable costing.

4. 3. Reconcile the operating income reported under the two methods by listing the two key places where the income statements differ.

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

Answer 1

Answer Part a)

Variable Costing	Amount
Direct Material	11
Direct Labor	4
Variable Overhead	6
Unit Product cost	21

Part b)

Absorption Costing	Amount
Direct Material	11
Direct Labor	4
Variable Overhead	6
Fixed Overhead	4
Unit Product cost	25

Answer 2 a)

Absorption Costing Income Statement
Sales		4560000
Beginning Invenotry
Add: Cost of goods manufactured	4000000
Goods available for sale	4000000
Less: Ending Inventory	200000
Cost of goods sold	3800000
Gross Profit		760000
Selling and administrative cost	312000
Net operating income		448000

Part b)

Variable Costing income statement
Sales		4560000
Less: Variable Expenses
Beginning Invenotry
Add: Cost of goods manufactured	3360000
Goods available for sale	3360000
Less: Ending Inventory	168000
Variable cost of goods sold	3192000
Variable selling and administrative cost	152000
Contribution Margin		1216000
Less: Fixed Expenses
Manufacturing Overhead	640000
Selling and administrative	160000
Net operating income		416000

Answer 4

Reconcilation	Amount
Net operating income (Absorption Costing)	448000
Less: Fixed Manufacturing OH deffered	32000
Net operating income (Variable Costing)	416000