CHAP13EX Essay Example | Topics and Well Written Essays - 1000 words

CHAP13EX - Essay Example During November, the first month of the company’s fiscal year, $173,250 of manufacturing overhead was applied to Work in process Inventory using the predetermined overhead application rate of $15 per direct labor hour. Staley Toy co. makes toy flutes. Two manufacturing overhead application bases are used; some overhead is applied on the basis of machine hours at the rate of $7.50 per machine hour, and the balance of the overhead is applied at the rate of 200% of direct labor cost. Precision Numbers, Inc. manufactures pocket calculators. Cost incurred in making 25,000 calculators in April included $85,000 of fixed manufacturing overhead. The total absorption cost per calculator was $12.50. b. The ending inventory of pocket calculators was 1,850 units higher at the end of the month than at the beginning of the month. By how much and in what direction (higher or lower) would operating income for the month of April be different under variable costing than under absorption costing? The operating profit under variable costing would be lower by an amount of $6290 ($23125 – 16835) as compared to absorption costing profit because in variable costing the closing inventory is valued at variable cost only (1850 units x $ 9.1 = 16835) which gives higher cost of sales and reduces profit where as in absorption costing closing inventory is valued at variable cost plus absorbed fixed overheads (1850 units x $12.5 = $ 23125) which gives a lower cost of sales and increases