Question
F#13 produces frozen meals, which it sells for $10 each. The company uses the FIFO inventory costing method, and it computes a new monthly fixed
F#13
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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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 |
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| February | |
| Absorption | Variable |
| costing | costing |
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Requirement 2a. Prepare separate monthly income statements for January and for February, using absorption costing.
Louie's Meals | |||
Income Statement (Absorption Costing) | |||
Month Ended |
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| January 31 |
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Less: |
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Less: |
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February 28 |
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Requirement 2b. Prepare
Louie's Meals'
January and February income statements using variable costing.
Louie's Meals | ||||||
Contribution Margin Income Statement (Variable Costing) | ||||||
Month Ended |
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| January 31 | February 28 |
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Less: |
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Less: |
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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 |
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Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 1,600 meals | 1,900 meals |
Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 2,000 meals | 1,600 meals |
Variable manufacturing expense per meal. . . . . . . . . . | $5 | $5 |
Sales commission expense per meal. . . . . . . . . . . . . . | $1 | $1 |
Total fixed manufacturing overhead. . . . . . . . . . . . . | $800 | $800 |
Total fixed marketing and administrative expenses. . | $600 | $600 |
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