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:

Production (units)
Sales (units)
Selling Price
Direct Labor Hours
Manufacturing
Direct Materials
Direct Labor
Variable Overhead
Fixed overhead
Direct
Common *a
Nonmanufacturing Costs
Variable selling
Direct fixed selling
Common fixed selling
*b

Ladies
Mens
Wallet
Wallet
100,000
200,000
90,000
210,000
$5.50
$4.50
50,000
80,000
$75,000
250,000
20,000

$100,000
400,000
24,000

50,000
20,000

40,000
20,000

30,000
35,000
25,000

60,000
40,000
25,000

*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
Direct Labor

$79,950 Variable
Overhead
101,400 Fixed Overhead

$15,600
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.