MA33 Problem: Direct vs. Absorption Costing – Oma Company

MA33 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.