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Horngren'S Financial And Managerial Accounting
Found in: Page 1173

Short Answer

Preparing variable and absorption costing income statements Linda’s Foods produces frozen meals that it sells for $7 each. The company computes a new monthly fixed manufacturing overhead allocation rate based on the planned number of meals to be produced that month. Assume all costs and production levels are exactly as planned. The following data are from Linda’s Foods’s first month in business:

January 2018

Units produced and sold:

Sales 1,000 meals

Production 1,200 meals

Variable manufacturing cost per meal $ 3

Sales commission cost per meal 1

Total fixed manufacturing overhead 660

Total fixed selling and administrative costs 500

Requirements:

  1. Compute the product cost per meal produced under absorption costing and under variable costing.
  2. Prepare income statements for January 2018 using: a. absorption costing. b. variable costing.
  3. Is operating income higher under absorption costing or variable costing in January?

  1. Total unit product cost is $3.55 and $3 under absorption and variable costing respectively.
  2. Operating income as per absorption costing and variable costing is $1,950 and $1,840.
  3. Operating income is higher under absorption costing in January.
See the step by step solution

Step by Step Solution

Step 1: Calculation of unit product cost using variable and absorption costing (a)

Particulars

Absorption costing

Variable Costing

Variable manufacturing overhead

$3

$3

Fixed manufacturing overhead ($660/1,200)

$0.55

-

Total unit product cost

$3.55

$3

Step 2: Income statement absorption costing format 2(a):

Particulars

Absorption Costing

Net sales revenue ($7x1,000)

$7,000

Less: Cost of goods sold ($3.55x1,000)

$3,550

Gross profit

$3,450

Variable selling and administrative cost ($1x1,000)

$1,000

Fixed selling and administrative cost

$500

Operating Income

$1,950

Step 3: Income statement variable costing format 2(b)

Particulars

Variable Costing

Net sales revenue ($7x1,000)

$7,000

Less: Cost of goods sold

Variable cost of goods sold ($3x1,000)

$3,000

Variable selling and administrative cost ($1x500)

$1,000

Contribution margin

$3,000

Less: Fixed costs

Fixed costs of goods sold

$660

Fixed selling and administrative cost

$500

Operating Income

$1,840

Step 4: Profitability Analysis (c):

Operating income is higher under absorption costing.

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