Question

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

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

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

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

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

Profitability Analysis

Operating income is higher under absorption costing.