Nický\'s Entrees produces frozen meals, which it sells for S7 each. The company

Question

Nický's Entrees produces frozen meals, which it sells for S7 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 exactiy as planned. The following data are from the company's first two months in business: (Click the icon to view the data.) Requirements 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.

Explanation / Answer

1.

2.a.

Working:

2.b.

Working:

3.

The reason for the difference in the net operating incomes between the methods of costing, is that under absorption costing, the total production cost including the fixed costs are sued for valuing the inventory , which results n carrying over some of the fixed costs to the next period., when the production is is more than sales.

For example , in January 25% of the production (500 out of 2,000 units produced) are carried into February, which has resulted in carrying 25% of the fixed manufacturing expenses i.e,$200 (25% of $800) into February, thereby resulting in higher net income under absorption costing than under variable costing.

Product Cost - Absorption Costing January February Production 2000 1600 Per unit Total Per unit Total Variable manufacturing expenses $4.00 $8,000.00 $4.00 $6,400.00 Fixed manufacturing overhead $800.00 $800.00 Total cost of manufacture $8,800.00 $7,200.00 Cost per unit $4.40 $4.50

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