Question

Clarita's Foods produces frozen meals that it sells for $9 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 Clarita's Foods's first month in business:

Answer 1

1)	Calculation of total product cost per meal	Absorption Costing	Variable Costing
	Variable manufacturing cost per meal	4	4
	Fixed manufacturing OH	0.55		(660/1200)
	Total Product Cost	4.55	4
2 a)	Clarita's Foods
	Income Statement (Absorption Costing)
	Month Ended January 31, 2008
	Sales	9000
	Less: Cost of Goods Sold (4.55*1000)	4550
	Gross profit	4450
	Less: Selling and admin expense	1800
	Operating Income	2650
2 b)	Clarita's Foods
	Income Statement ( Variable Costing)
	Month Ended January 31, 2008
	Sales	9000
	Less: Cost of Goods Sold (4.*1000)	4000
	Gross profit	5000
	Less: Selling and admin expense	2460
	Operating Income	2540
3)	Absorption costing operating income is higher than variable costing income statement