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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?

Short Answer

Expert verified
  1. Total unit product cost is $5.30 and $5under absorption and variable costing respectively.
  2. Contribution margin is $3,545 and gross profit is $3,485.
  3. In January operating income is higher under absorption costing.

Step by step solution

01

Calculation of unit product cost using variable and absorption costing

Particulars

Absorption costing

Variable Costing

Variable manufacturing overhead

$5

$5

Fixed manufacturing overhead ($315/1,050)

$0.30

-

Total unit product cost

$5.30

$5

02

Income statement absorption costing format 

Particulars

Absorption Costing

Net sales revenue ($11x850)

$9,350

Less: Cost of goods sold ($5.30x850)

$4,505

Gross profit

$4,845

Variable selling and administrative cost ($1x850)

$850

Fixed selling and administrative cost

$450

Operating Income

$3,545

03

Income statement variable costing format

Particulars

Variable Costing

Net sales revenue ($11x850)

$9,350

Less: Cost of goods sold

Variable cost of goods sold ($5x850)

$4,250

Variable selling and administrative cost ($1x850)

$850

Contribution margin

$4,250

Less: Fixed costs

Fixed costs of goods sold

$315

Fixed selling and administrative cost

$450

Operating Income

$3,485

04

Profitability Analysis

Operating income is higher under absorption costing.

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