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Marty's Entrees produces frozen meals, which it sells for $9 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: (Click the icon to view the data.) Read the requirements 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 February Absorption Variable Absorption Variable costing costing costing costing Total product cost Requirement 2a. Prepare separate monthly income statements for January and for February, using absorption costing. Marty's Entrees Income Statement (Absorption Costing) Month Ended January February 31 28 Less: Less Requirement 2b. Prepare Marty's Entrees' January and February income statements using variable costing, Marty's Entrees 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 variable costing income. This is because units produced were units sold. Absorption costing defers some of costs in the units of ending inventory. These costs will not be until those units are sold. Deferring these costs to the future January's absorption costing income. In February, absorption costing operating income variable costing operating income. This is because units produced were V units sold for the month. As inventory as was the case in this February, January's costs that absorption costing assigned to that inventory are expensed in This February's absorption costing income. January February 1,300 1,600 Sales .meals meals 1,600 1,500 Production .. meals meals Variable manufacturing expense per meal $4 Sales commission expense per meal $2 Total fixed manufacturing overhead . $1,200 $1,200 Total fixed marketing and administrative expenses .. $800 $800 $2 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 the following: 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
