Question

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? Print Done

Answer 1

Ans. 1	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per meal.
	In absorption costing method, the unit product cost is the sum of all manufacturing costs per meal
	whether it is fixed or variable.
	Particulars	Absorption	Variable
	Variable manufacturing cost per meal	$6.00	$6.00
	Fixed manufacturing cost per meal	$0.50
	Product Cost per meal	$6.50	$6.00
	Fixed manufacturing cost per meal   = Fixed manufacturing overhead / Units produced
	$700 / 1,400
	$0.50 per meal
Ans. 2	CLAUDIA'S FOODS
	Absorption Costing Income Statement
	PARTICULARS		Amount
	Sales   (1,000 * $15)		$15,000
	Less: Cost of goods sold
	Opening inventory	$0
	Add: Cost of goods manufactured (1,400*$6.50)	$9,100
	Cost of goods available for sale	$9,100
	Less: Ending inventory [(1,400 - 1,000) * $6.50]	-$2,600
	Cost of goods sold (total)		$6,500
	Gross margin		$8,500
	Selling & Administrative expenses:
	Fixed	$650
	Variable sales commission (1,400 * $3)	$4,200
	Total Selling and administrative expenses		$4,850
	Net operating income		$3,650
	*Ending inventory   = (Units produced - Units sold) * Production cost per meal
	CLAUDIA'S FOODS
	Variable Costing Income Statement
	PARTICULARS		Amount
	Sales   (1,000 * $15)		$15,000
	Less: Variable cost of goods sold:
	Opening inventory	$0
	Add: Variable cost of goods manufactured (1,400 * $6)	$8,400
	Variable cost of goods available for sale	$8,400
	Less: Ending inventory [(1,400 - 1,000) * $6]	-$2,400
	Variable cost of goods sold		$6,000
	Gross Contribution Margin		$9,000
	Less: Variable sales commission (1,400 * $3)		$4,200
	Contribution Margin		$4,800
	Less: Fixed expenses:
	Fixed manufacturing overhead	$700
	Fixed selling and administrative expenses	$650	$1,350
	Net operating income		$3,450
	*Variable cost of goods manufactured = Units produced * Variable unit product cost
Ans. 3	Operating income under absorption costing is higher than variable costing
	in the month of January.