Mark\'s Meals produces frozen meals, which it sells for $7 each. The company use
ID: 2416597 • Letter: M
Question
Mark's Meals produces frozen meals, which it sells for $7 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: Compute the product cost per meal produced under absorption costing and under variable costing. Do this first for January and then for February. Prepare separate monthly income statements for January and for February, using the following: Absorption costing Variable costing. 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. Compute the product cost per meal produced under absorption costing and under variable costing. Do this first for January and then for February. Prepare separate monthly income statements for January and for February, using absorption costing.Explanation / Answer
Answer 1. Calculation of Cost per Meal Under Absorption Costing Jan. Feb. Variable Manufacturing Cost 4.00 4.00 Fixed Manufacturing Overhead Jan - $800 / 2000 Meals 0.40 Feb - $800/1600 Meals 0.50 Total Cost Per Meal 4.40 4.50 Calculation of Cost per Meal Under Variable Costing Jan. Feb. Variable Manufacturing Cost 4.00 4.00 Total Cost Per Meal 4.00 4.00 Note: Marketing and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost. Answer 2. Monthly Income Statement Under Absorption Costing Jan. Feb. Sales in Meals 1600 1900 SP per Meal $7 $7 Sales In $ 11,200 13,300 Less: Cost of Goods Sold (7,040) (8,510) Less: Sales Commission (1,600) (1,900) Jan. - $1 X 1600 Meals Feb. - $1 X 1900 Meals Less: Fixed Marketing & admnistrative exp. (400) (400) Net Income / (Loss) 2,160 2,490 Calculation of Cost of Goods Sold Jan. Feb. Inventory of Meals at the beginning - 1,760 Add: Produced During the Month Jan - 2000 Meals X $4.40 8,800 Feb. - 1600 Meals X $4.50 7,200 Less: Clsoing Inventory of Meals Jan - 400 Meals X $4.40 (1,760) Feb. - 100 Meals X $4.50 (450) Cost of Goods Sold 7,040 8,510 Calculation of Closing inventory Jan. Feb. Op. Inventory - 400 Add: Production during the Month 2,000 1,600 Less: Sales during the month (1,600) (1,900) Closing Inventory in nos 400 100 Monthly Income Statement Under Variable Costing Jan. Feb. Sales in Meals 1600 1900 SP per Meal $7 $7 Sales In $ 11,200 13,300 Less: Cost of Goods Sold (6,400) (7,600) Less: Sales Commission (1,600) (1,900) Jan. - $1 X 1600 Meals Feb. - $1 X 1900 Meals Less: Fixed manufacturing overhead (800) (800) Less: Fixed Marketing & admnistrative exp. (400) (400) Net Income / (Loss) 2,000 2,600 Calculation of Cost of Goods Sold Jan. Feb. Inventory of Meals at the beginning - 1,600 Add: Produced During the Month Jan - 2000 Meals X $4 8,000 Feb. - 1600 Meals X $4 6,400 Less: Clsoing Inventory of Meals Jan - 400 Meals X $4 (1,600) Feb. - 100 Meals X $4 (400) Cost of Goods Sold 6,400 7,600 Calculation of Closing inventory Jan. Feb. Op. Inventory - 400 Add: Production during the Month 2,000 1,600 Less: Sales during the month (1,600) (1,900) Closing Inventory in nos 400 100 Answer 3. Calculation of Diffence in Operating Income Under Absorption and Variable Costing Jan. Feb. Income Under Absorption Costing 2,160 2,490 Income Under Variable Costing 2,000 2,600 Differrence 160 (110)