# Absorption costing & Variable costing

Skinny Dippers, Inc. produces nonfat frozen yogurt. The product is sold in five-gallon containers, which have the following price and variable costs.

Sales price …………………………………………\$15

Direct material …………………………………….5

Direct labor …………………………………………..2

Variable overhead ………………………………..3

Budgeted fixed overhead in 20×1, the company’s first year of operations, was \$300,000. Planned and actual production was 150,000 five-gallon containers, of which 125,000 were sold. Skinny Dippers, Inc. incurred the following selling and administrative expenses.

Fixed ……………………………………………\$50,000 for the year

Variable ……………………………………….\$1 per container sold

Required:

1. Compute the product cost per container of frozen yogurt under ( a ) variable costing and ( b ) absorption costing.
2. Prepare income statements for 20×1 using ( a ) absorption costing and ( b ) variable costing.
3. Reconcile the income reported under the two methods by listing the two key places where the income statements differ.
4. Reconcile the income reported under the two methods using the shortcut method.

Exercise 17–20

Breakfast time Cereal Company manufactures two breakfast cereals in a joint process. Cost and quantity information is as follows:

Joint Cost     Cereal         Quantity at Split-Off Point Sales         Price per Kilogram

\$30,000       Yummies ………..12,000 kilograms ……………………..\$2.00

Crummies ……………….. 8,000 kilograms ……………….2.50

Required: Use the physical-units method to allocate the company’s joint production cost between Yummies and Crummies.

Exercise 17–21

Refer to the data given in the preceding exercise.

Required: Use the relative-sales-value method to allocate Breakfasttime Cereal Company’s joint production cost between Yummies and Crummies.

Exercise 17–22

Refer to the data given in Exercise 17–20 . Breakfasttime Cereal Company has an opportunity to process its Crummies further into a mulch for ornamental shrubs. The additional processing operation costs \$.50 per

Required:

1. Should Breakfasttime’s management decide to process Crummies into the mulch? Why?
2. Suppose the company does process Crummies into the mulch. Use the net-realizable-value method to allocate the joint production cost between the mulch and the Yummies.kilogram, and the mulch will sell for \$3.50 per kilogram.