Management Advisory Services

Exercise 2-8. Cadbury Co. uses a standard cost system in accounting for its only product which it sells @ P22 per unit. The standard unit cost is: Direct materials....... P4 Direct labor.........)... 6 Variable factory overhead. 2 Fixed factory overhead (based on normal capacity of 60,000 units). P 15 All variances are closed to Cost of Goods Sold. On October 1, there were 10,000 units on hand. During October, 50,000 units were produced and 45,000 were sold. Costs incurred during October were: Direct materials P 198,000 Direct labor 305,000 PRO Variable factory overhead 103,000 Fixed factory overhead 186,000 Variable marketing and administrative 50,000 Fixed marketing and administrative 74,000 Required: (1) Explain whether the company uses direct or absorption costing. (2) Prepare an income statement for October, using direct costing (3) Compute the operating income for October if absorption costing is used