Question

Munoz Company incurred manufacturing overhead cost for the year as follows.

Direct materials	$	39.70	/unit
Direct labor	$	26.70	/unit
Manufacturing overhead
Variable	$	11.80	/unit
Fixed ($18.50/unit for 1,300 units)	$	24,050
Variable selling and administrative expenses	$	5,920
Fixed selling and administrative expenses	$	14,400

The company produced 1,300 units and sold 800 of them at $180.70 per unit. Assume that the production manager is paid a 1 percent bonus based on the company’s net income.

Required

1. Prepare an income statement using absorption costing.

2. Prepare an income statement using variable costing.

3. Determine the manager’s bonus using each approach. Which approach would you recommend for internal reporting?

A

Costs of goods sold

B.

Variable Costs

C.

Absorption Costing
Variable costing
Reccomended?

Answer 1

Answer:

Solution a:
Munoz Company
Income Statement
(Absorption Costing)
	Amount($)	Amount($)
Revenues (800*$180.70)		1,44,560
Cost of goods sold:
Direct materials (800*$39.70)	31,760
Direct labor (800*$26.70)	21,360
Variable Manufacturing overhead [800*$11.80]	9,440
Fixed Manufacturing overhead [800*$18.5]	14,800
Cost of goods sold		77,360
Gross margin		67,200
Variable Selling and administrative expenses	5,920
Fixed Selling and administrative expenses	14,400
Total Selling and administrative expense		20,320
Net income		46,880
Solution b:
Munoz Company
Income Statement
(Variable Costing)
	Amount($)	Amount($)
Revenues		1,44,560
Variable Costs:
Direct materials	31,760
Direct labor	21,360
Variable Manufacturing overhead	9,440
Variable Selling and administrative expenses	5,920
Total variable costs		68,480
Contribution Margin		76,080
Fixed Costs:
Fixed Manufacturing overhead	24,050
Fixed Selling and administrative expenses	14,400
Total Fixed costs		38,450
Net income		37,630
Solution c:
Manager’s bonus using each approach
Absorption costing ($46880*1%)	469
Variable costing (37630*1%)	376
Which approach is recommended?	Variable costing