Question

Ned's Entrees produces frozen​ meals, which it sells for $ 10 each. The company uses the FIFO inventory costing​ method, and it computes a new monthly fixed manufacturing overhead rate based on the actual number of meals produced that month. All costs and production levels are exactly as planned. The following data are from the​ company's first two months in​ business: LOADING...​(Click the icon to view the​ data.) Requirements 1. Compute the product cost per meal produced under absorption costing and under variable costing. Do this first for January and then for February. 2. Prepare separate monthly income statements for January and for​ February, using the​ following: a. Absorption costing b. Variable costing. 3. Is operating income higher under absorption costing or variable costing in​ January? In​ February? Explain the pattern of differences in operating income based on absorption costing versus variable costing. Requirement 1. Compute the product cost per meal produced under absorption costing and under variable costing. Do this first for January and then for February. January Absorption Variable costing costing Total product cost 3.35 3 February Absorption Variable costing costing 3.50 3 Requirement 2a. Prepare separate monthly income statements for January and for​ February, using absorption costing. Ned's Entrees Income Statement (Absorption Costing) Month Ended January 31 Sales revenue 14000 Less: Cost of goods sold 4690 Gross profit Less: Operating expenses Operating income February 28 17000 Requirement 2b. Prepare Ned's Entrees​' January and February income statements using variable costing. Ned's Entrees Contribution Margin Income Statement (Variable Costing) Month Ended January 31 February 28 Less: Less: Requirement 3. Is operating income higher under absorption costing or variable costing in​ January? In​ February? Explain the pattern of differences in operating income based on absorption costing versus variable costing. In​ January, absorption costing operating income ▼ equals exceeds is less than variable costing income. This is because units produced were ▼ equal to greater than less than units sold. Absorption costing defers some of ▼ January's February's ▼ fixed manufacturing overhead nonmanufacturing variable manufacturing overhead costs in the units of ending inventory. These costs will not be ▼ capitalized expensed paid for in cash until those units are sold. Deferring these ▼ fixed manufacturing overhead nonmanufacturing variable manufacturing overhead costs to the future ▼ increases decreases ​January's absorption costing income. In​ February, absorption costing operating income ▼ equals exceeds is less than variable costing operating income. This is because units produced were ▼ equal to greater than less than units sold for the month. As inventory ▼ increases declines ​, as was the case in this​ February, January's ▼ fixed manufacturing overhead nonmanufacturing variable manufacturing overhead costs that absorption costing assigned to that inventory are expensed in ▼ January February . This ▼ increases decreases ​February's absorption costing income.

	January		February
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,400	meals	1,600	meals
Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,000	meals	1,400	meals
Variable manufacturing expense per meal. . . . . . . . . . . .	$3		$3
Sales commission expense per meal. . . . . . . . . . . . . . . .	$2		$2
Total fixed manufacturing overhead. . . . . . . . . . . . . . .	$700		$700
Total fixed marketing and administrative expenses. . . . .	$600		$600

Answer 1

a)Unit product cost for month of January :

	Absorption costing	Variable costing
Variable manufacturing expense per meal	3	3
Fixed manufacturing overhead	700/2000= .35	0
Total product cost	3.35	3

Unit product cost for February :

	Absorption costing	Variable costing
Variable manufacturing expense per meal	3	3
Fixed manufacturing overhead	700/1400=.50	0
Total product cost	3.50	3

**Fixed overhead cost per unit =Total fixed overhead /units produced

2)

Income statement under absorption costing :

INCOME STATEMENT
	JANUARY	FEBRUARY
Sales revenue	1400*10=14000	1600*10=16000
less:cost of goods sold	1400*3.35=4690	1600*3.50= 5600
Gross margin	9310	10400
less:Selling and administrative expense	3400	3800
Net income /(loss)	5910	6600

**Selling and administrative expense:

Jan :[1400*2]+600 = 2800+600= 3400

Feb :[1600*2]+600 = 3200+600= 3800

Income statement under variable costing:

INCOME STATEMENT
	JANUARY	FEBRUARY
Sales revenue	1400*10=14000	1600*10=16000
Less:variable expense
Variable manufacturing expense	1400*3=4200	1600*3= 4800
sales commissions	1400*2=2800	1600*2= 3200
Total variable expense	7000	8000
contribution margin	7000	8000
less:fixed cost
Fixed manufacturing cost	700	700
Fixed marketing and administrative expense	600	600
Total fixed cost	1300	1300
Income /(loss)	5700	6700

3)

Operating income is higher under absorption costing in January.

Operating income is higher under variable costing in February .

4)

In month of January ,Operating income is higher under absorption costing as under absorption costing defers some of January's fixed manufacturing overhead costs in the units of ending inventory . These costs will not be expensed paid for in cash until those units are sold. Deferring these fixed manufacturing overhead costs to the future increases January's absorption costing income

Ending inventory in month of Jan = 2000-1400 =600

Fixed manufacturing overhead deferred = 600*.35 = 210

In​ February, absorption costing operating income is less than variable costing operating income. This is because units produced were less than units sold for the month. As inventory declines ​, as was the case in this​ February, fixed manufacturing overhead costs that absorption costing assigned to that inventory are expensed in   February . This   decreases ​February's absorption costing income.