6#3

produces frozen meals, which it sells for

$10

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:

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(Click the icon to view the data.)Read the requirements

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.

Requirement 1. Compute the product cost per meal produced under absorption costing and under variable costing. Do this first for January and then for February.

	January
	Absorption	Variable
	costing	costing
Total product cost

	February
	Absorption	Variable
	costing	costing

Requirement 2a. Prepare separate monthly income statements for January and for February, using absorption costing.

Larry's Foods

Income Statement (Absorption Costing)

Month Ended

		January 31
Less:
Less:

February 28

Requirement 2b. Prepare

Larry's Foods'

January and February income statements using variable costing.

Larry's Foods

Contribution Margin Income Statement (Variable Costing)

Month Ended

				January 31	February 28
Less:
Less:

Requirement 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.

In January, absorption costing operating income

equals

exceeds

is less than

variable costing income. This is because units produced were

equal to

greater than

less than

units sold. Absorption costing defers some of

January's

February's

fixed manufacturing overhead

nonmanufacturing

variable manufacturing overhead

costs in the units of ending inventory. These costs will not be

capitalized

expensed

paid for in cash

until those units are sold. Deferring these

fixed manufacturing overhead

nonmanufacturing

variable manufacturing overhead

costs to the future

increases

decreases

January's absorption costing income.In February, absorption costing operating income

equals

exceeds

is less than

variable costing operating income. This is because units produced were

equal to

greater than

less than

units sold for the month. As inventory

increases

declines

, as was the case in this February, January's

fixed manufacturing overhead

nonmanufacturing

variable manufacturing overhead

costs that absorption costing assigned to that inventory are expensed in

January

February

. This

increases

decreases

February's absorption costing income.

Data table

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	January	February
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,500 meals	1,800 meals
Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,000 meals	1,400 meals
Variable manufacturing expense per meal. . . . . . . . . .	$3	$3
Sales commission expense per meal. . . . . . . . . . . . . .	$2	$2
Total fixed manufacturing overhead. . . . . . . . . . . . .	$700	$700
Total fixed marketing and administrative expenses. .	$400	$400