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 CostsPer Unit Total Actual CostsDirect material $12.40 $1,698,800 $1,587,200Direct labor 9.70 1,328,900 1,241,600Variable manufacturing overhead 5.10 698,700 652,800Fixed manufacturing overhead 4.10 561,700 570,700Variable selling expenses 7.60 1,041,200 919,600Fixed selling expenses 7.10 972,700 972,700Variable administrative expenses 3.00 411,000 363,000Fixed administrative expenses 2.60 356,200 362,200Total $51.60 $7,069,200 $6,669,800Planned Activity Actual ActivitySales in units 137,000 121,000Production in units 137,000 128,000Beginning finished-goods inventory in units 43,000 43,000The budgeted per-unit cost figures were based on the company producing and selling 137,000 units in 20x4. Outback uses a predetermined overhead rate for applying manufacturing overhead to its product. A total manufacturing overhead rate of $9.20 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 $70.90 per unit.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.)

Answer 1

Answer and Explanation:

The computation is shown below:

As we know that

1) Closing inventory = Beginning Inventory + Units produced - units sold

= 43,000 + 128,000 - 121,000

= 50,000 units

Now Cost per unit = Direct material per unit + direct labor per unit + Variable manufacturing overhead + fixed Manufacturing overhead

= $12.40 + $9.70 + $5.10 + $4.10

= $31.30

So, Ending finished-goods inventory under absorption costing is

= Closing Inventory × Cost per unit

= 50,000 units × $31.30

= $1,565,000

2)

Closing Inventory is

= 43,000 + 128,000 - 121,000

= 50,000 units

Cost per unit = Direct material per unit + direct labor per unit + Variable manufacturing overhead

= $12.40 + $9.70 + $5.10

= $27.20

So, Ending finished-goods inventory under Variable costing  is

= Closing Inventory × Cost per unit

= 50,000 units × $27.20

= $1,360,000

3)  Now the difference is

As we know that

Increase in inventory in units is

= Production - sales

= 128,000 - 121,000

= 7,000 units

And, the Fixed manufacturing overhead = $4.10

So, the Difference in reported income is

= Increase in inventory in units × Fixed manufacturing overhead

= 7,000 units × $4.10

= $28,700