Problem:
White Laser Company management uses predetermined VOH and FOH rates to apply overhead to its products. For 2009, the company budgeted production at 27,000units, which would require 54,000 direct labor hours (DLHs) and 27,000 machine hours (MHs). At that level of production, total variable and fixed manufacturing over-head costs were expected to be $13,500 and $105,300, respectively. Variable over-head is applied to production using direct labor hours, and fixed overhead is applied using machine hours. During 2009, White Laser Company produced 23,000 units and experienced the following operating statistics and costs: 46,000 direct labor hours; 23,000 machine hours; $11,980 actual variable manufacturing overhead; and$103,540 actual fixed manufacturing overhead. By the end of 2009, all 23,000 units that were produced were sold; thus, the company began 2010 with no beginning finished goods inventory.
In 2010 and 2011, White Laser Company management decided to apply manufacturing overhead to products using units of production (rather than direct labor hours and machine hours). The company produced 25,000 and 20,000 units, respectively, in 2010 and 2011. White Laser's budgeted and actual fixed manufacturing overhead for both years was $100,000. Production in each year was projected at 25,000 units. Variable production cost (including variable manufacturing overhead) is $3 per unit.
The following absorption costing income statements and supporting information are available:
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2010
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2011
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Net sales (20,000 units and 22,000 units)
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$300,000
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$330,000
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Cost of goods sold (a)
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(140,000)
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(154,000)
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Volume variance (0 and 5,000 units × $4)
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0
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(20,000)
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Gross margin
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$160,000
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$156,000
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Operating expenses (b)
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(82,500)
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(88,500)
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Income before tax
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$ 77,500
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$ 67,500
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(a) Cost of goods sold
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Beginning inventory
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$ 0
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$ 35,000
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Cost of goods manufactured
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175,000
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140,000
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Goods available for sale
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$175,000
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$175,000
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Ending inventory
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(35,000)
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(21,000)
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Cost of goods sold
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$140,000
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$154,000
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aCGM
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25,000 units × $7 (of which $3 are variable) = $175,000
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20,000 units × $7 (of which $3 are variable) = $140,000
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bEI
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25,000 - 20,000 = 5,000 units; 5,000 × $7 = $35,000
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5,000 + 20,000 - 22,000 = 3,000 units; 3,000 × $7 = $21,000
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(b) Analysis of operating expenses
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Variable
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$ 50,000
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$ 55,000
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Fixed
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32,500
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33,500
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Total
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$ 82,500
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$ 88,500
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Required:
a. Determine the predetermined variable and fixed overhead rates for 2009, and calculate how much underapplied or overapplied overhead existed at the end of that year.
b. Recast the 2010 and 2011 income statements on a variable costing basis.
c. Reconcile income for 2010 and 2011 between absorption and variable costing.