ACCOUTING 26

Absorption and Variable Costing; Segmented Income

Statements

Fine Leathers Company produces a ladies wallet and a mens wallet.

Selected data for the past year follow:

Ladies Mens
Wallet Wallet
Production (units) 100,000 200,000
Sales (units) 90,000 210,000
Selling Price $5.50 $4.50
Direct Labor Hours 50,000 80,000
Manufacturing
Direct Materials $75,000 $100,000
Direct Labor 250,000 400,000
Variable Overhead 20,000 24,000
Fixed overhead
Direct 50,000 40,000
Common *a 20,000 20,000
Nonmanufacturing Costs
Variable selling 30,000 60,000
Direct fixed selling 35,000 40,000
Common fixed selling 25,000 25,000
*b
*a Common Overhead totals $40,000 and is divided equally between the two products
*b Common fixed selling costs total $50,000 and are divided equally between the two
products

Budgeted fixed overhead for the year, $130,000, equaled the actual fixed
overhead. Fixed overhead is assigned to products using a plantwide rate
based on expected direct labor hours, which were 130,000. The company
had 10,000 mens wallets in inventory at the beginning of the year. These
wallets had the same unit cost as the mens wallets produced during the
year.

Required:
1. Compute the unit cost for the ladies and mens wallets using the
variable-costing method. Compute the unit cost using absorption
costing.
2. Prepare an income statement using absorption costing.
3. Prepare an income statement using variable costing.
4. Prepare a segmented income statement using products as segments.

Inventory Valuation under Absorption Costing

Absolutely Company produced 39,000 units during its first year of operations
and sold 38,900 at $17 per unit. The company chose practical activity at
39,000 units to compute its predetermined overhead rate. Manufacturing
costs are as follows:

Direct Materials $79,950 Variable $15,600

Overhead
Direct Labor 101,400 Fixed Overhead 50,700
Required:
1. Calculate the unit cost for each of these four costs.
2. Calculate the cost of one unit of product under absorption costing.
3. How many units are in ending inventory?
4. Calculate the cost of ending inventory under absorption costing.