Question

Mario's Foods produces frozen meals, which it sells for $8 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 (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.

Answer 1

Requirement-1
	Aas per Absorption		As per Variable
	Jan	Feb	Jan	Feb
Variable Manufacturing cost	$3.00	$3.00	$3.00	$3.00
Fixed Manufacturing cost ($800/2000 meal ) (800/1600 meal)	$0.40	$0.50
Unit Product cost	$3.40	$3.50	$3.00	$3.00
Requirement -2(a) The Absorption Costing Income Statement
	Jan	Feb
No. of Unit Sold	1600	1900
Sales @8	$12,800	$15,200
Less: Cost of Goods sold @$3.40 & $3.50	$5,440	6650
Gross Margin	$7,360	$8,550
Less: Other Expense
Sales Comission cost per meal @ 1	$1,600	$1,900
Fixed Selling & Admin Cost	$600	600
Net operating income	$5,160	$6,050
Requirement: 2(b): The Variable Costing Income Statement
	Jan	Feb
No. of Unit Sold	1600	1900
Sales @8	$12,800	$15,200
Less: Variable cost
variable Manaufacturing cost @$3	$4,800.00	$5,700.00
Sales Comission cost per meal @ 1	$1,600.00	$1,900.00
Contribution margin	$6,400.00	$7,600.00
Fixed expense:
Fixed Manufacturing cost	$800.00	$800.00
Fixed Selling & Admin Cost	$600.00	$600.00
Net operating Income	$5,000.00	$6,200.00

3. In January , Absorption costing Operating ncome higher under variable costing Income . The is because Unit produced were greater than Unit sold.

Absorption Costing Deferes some of January's Fixed manufacturing Cost in the Unit Ending Inventory . These cost will not be expensed untill those uni were Sold.