Chapter 21: Q-21-8RQ (page 1167)
Explain how increasing production can increase gross profit when using absorption costing.
Answer
Gross profit can be increased by reducing fixed manufacturing overhead per unit.
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Preparing variable and absorption costing income statements
Claudia’s Foods produces frozen meals that it sells for \(11 each. The company computes a new monthly fixed manufacturing overhead allocation rate based on the planned number of meals to be produced that month. Assume all costs and production levels are exactly as planned. The following data are from Linda’s Foods’s first month in business:
January 2018 Units produced and sold: Sales 850 meals Production 1,050 meals Variable manufacturing cost per meal \) 5Sales commission cost per meal 1 Total fixed manufacturing overhead 315Total fixed selling and administrative costs 450 Requirements
1. Compute the product cost per meal produced under absorption costing and under variable costing.
2. Prepare income statements for January 2018 using: a. absorption costing. b. variable costing.
3. Is operating income higher under absorption costing or variable costing in January?
How are absorption costing and variable costing the same? How are they different?
In the long run, all costs are controllable. Is this statement true? Why or why not?
Calculating contribution margin and operating income, variable costing
Calculate the contribution margin and operating income for June using variable costing.
Use the following information for Short Exercises S21-4 and S21-5.
Dracut Company reports the following information for June:
Net Sales Revenue $ 755,000 Variable Cost of Goods Sold 240,000 Fixed Cost of Goods Sold 198,000 Variable Selling and Administrative Costs 168,000 Fixed Selling and Administrative Costs 79,000
Preparing variable and absorption costing income statements Linda’s Foods produces frozen meals that it sells for \(7 each. The company computes a new monthly fixed manufacturing overhead allocation rate based on the planned number of meals to be produced that month. Assume all costs and production levels are exactly as planned. The following data are from Linda’s Foods’s first month in business:
January 2018
Units produced and sold:
Sales 1,000 meals
Production 1,200 meals
Variable manufacturing cost per meal \) 3
Sales commission cost per meal 1
Total fixed manufacturing overhead 660
Total fixed selling and administrative costs 500
Requirements:
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