Absorption and variable costing income statements (Learning Objective 7) (Appendix) Mario’s Foods produces frozen meals, which it sells for $7 each. The company uses the FIFO inventory costing method, and it computes a new monthly fixed manufac¬ turing 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 Mario’s Foods’ first two months in business:

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:

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.

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Sales Production Variable manufacturing expense per meal Sales commission expense per meal Total fixed manufacturing overhead Total fixed marketing and administrative expenses January 2007 February 2007 1,000 meals 1,200 meals 1,400 meals 1,000 meals $ 4 $ 4 $ 1 $ 1 $ 700 $ 700 $ 600 $ 600