Problem: Direct vs. Absorption Costing - Oma Company
Oma Company uses a standard cost system. The following information represents Oma's resultsfor the year ended December 31, 20XX:Direct materials standard rate $5.00/unitDirect labour rate $12.00/hour Direct labour inputs per unit 3 hoursBudgeted manufacturing fixed overhead at the beginning of the year $810,000Fixed manufacturing overhead is applied on the basis of direct labour hoursEstimated direct labour hours at the beginning of the year 540,000Selling price $55.00/unitVariable selling & administration $1.50/unitFixed selling & administration $450,000Beginning finished goods inventory 50,000 unitsCost of beginning finished goods inventory $2,400,000Ending finished goods inventory 63,000 unitsSales 160,000 unitsActual fixed manufacturing overhead for the year $795,000Variable overhead $2.50/unitMake the following assumptions:-
- Over- or under- applied overhead is expensed to cost of sales
- There were no price, spending, or efficiency variances-
- There were no beginning or ending W-I-P or direct materials inventory-
- Variable costs per unit are consistent year over year
Required:
1. What is the under- or over- applied overhead for the year? Show the components of theunder- or over- applied overhead.
2. Prepare an income statement using the direct costing approach.
3. Prepare an income statement using the absorption costing approach.
4. Explain the difference in the operating income calculated in part 2 and 3