Rooney Company incurred manufacturing overhead cost for the year as follows: Dir
ID: 2534448 • Letter: R
Question
Rooney Company incurred manufacturing overhead cost for the year as follows: Direct materials Direct labor Manufacturing overhead $39.50/unit $27.80/unit $ 11.90/unit $22,200 $ 4,410 $15,500 Variable Fixed ($18.50/unit for 1,200 units) Variable selling and administrative expenses Fixed selling and administrative expenses The company produced 1,200 units and sold 700 of them at $181.70 per unit. Assume that the production manager is paid a 1 percent bonus based on the company's net income. Required a. Prepare an income statement using absorption costing. b. Prepare an income statement using variable costing c. Determine the manager's bonus using each approach. Which approach would you recommend for internal reporting?Explanation / Answer
Rooney Company
Absorption Costing Income Statement
Revenues
127,190
Cost of goods sold:
Cost of goods manufactured
$117,240
Less: Cost of ending inventory
$48,850
Cost of goods sold
$68,390
Gross Margin
$58,800
Less: Selling and administration expenses:
variable
$4,410
Fixed
15,500
$19,910
Net operating income
$38,890
Production manager's bonus
1% of net income
38,890 x 1% = $389
Note:
Direct material$39.50
Direct labor$27.80
Variable overhead$11.90
Fixed MOH$18.50
Total $97.70
Income Statement based on Variable Costing
Revneue
$127,190
Variable costs:
Direct materials
27,650
Direct labor @ $27.80
$19,460
variable overhead @$11.90
$8,330
Variable selling overhead @$6.30
$4,410
Total variable costs
$59,850
Contribution margin
$67,340
Less: Fixed costs -
manufacturing overhead
$22,200
selling and administration expenses
$15,500
Total fixed costs
$37,700
Net Income
$29,640
Production manager bonus
at 1% of net income
29,640 x 1% = $296
Absorption Costing
Production manager's bonus
1% of net income
38,890 x 1% = $389
Variable Costing
Production manager bonus
at 1% of net income
29,640 x 1% = $296
For internal reporting purposes, Absorption Costing method is suggested this method is most commonly practiced and variable costing method is mainly suitable for short-term decision making purposes.
Absorption Costing Income Statement
Revenues
127,190
Cost of goods sold:
Cost of goods manufactured
$117,240
Less: Cost of ending inventory
$48,850
Cost of goods sold
$68,390
Gross Margin
$58,800
Less: Selling and administration expenses:
variable
$4,410
Fixed
15,500
$19,910
Net operating income
$38,890
Production manager's bonus
1% of net income
38,890 x 1% = $389
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