Comparing Full Absorption and Variable Costing
Happy Hula manufactures authentic Hawaiian hula skirts that are purchased for traditional Hawaiian celebrations, costume parties, and other functions. During its first year of business, the company incurred the following costs:
Variable Cost per Hula Skirt |
|
Direct materials | $ 7.35 |
Direct labor | 2.50 |
Variable manufacturing overhead | 1.05 |
Variable selling&administrative expenses | 0.40 |
Fixed Cost per Month |
|
Fixed manufacturing overhead | $15,875 |
Fixed selling and administrative expenses | 4,950 |
Happy Hula charges $30 for each skirt that it sells. During the first month of operation, it made 1,500 skirts and sold 1,375.
Required:
1. Assuming Happy Hula uses variable costing, calculate the variable manufacturing cost per unit for last month.
2. Prepare a variable costing income statement for last month.
3. Assuming Happy Hula uses full absorption costing, calculate the full manufacturing cost per unit for last month.
4. Prepare a full absorption costing income statement.
5. Compare the two income statements and explain any differences.
6. Suppose next month Happy Hula expects to produce 1,200 hula skirts and sell 1,300. Without any calculations, explain whether variable or full absorption costing will show a higher income.
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