Question

Gia’s Foods produces frozen meals, which it sells for $8 each. The company computes a new monthly fixed manufacturing overhead rate based on the planned number of meals to be produced that month. All costs and production levels are exactly as planned. The following data are from Gia’s Foods first month in business.

		January 2007
	Sales	1,000 meals
	Production	1,400 meals
	Variable manufacturing cost per meal	$4.00
	Sales commission cost per meal	$1.00
	Total fixed manufacturing overhead	$700
	Total fixed marketing and administrative costs	$600

Requirements:

i)                  Compute the product cost per meal produced under absorption costing and under variable costing.

ii)               Prepare the income statement for January 2007 using variable costing

List three situations in which marginal costing, as a technique, aids decision-making

Answer 1

Answer 1

Product cost per meal under absorption costing
	Total
Variable manufacturing cost (4*1400)	5600
Less: Fixed manufacturing overhead	700
Total cost of production	6300
Number of production	1400
Cost per meal (6300/1400)	4.5

Product cost per meal under absorption costing
	Total
Variable manufacturing cost (4*1400)	5600
Total cost of production	5600
Number of production	1400
Cost per meal (5600/1400)	4

Answer 2

Income statement using variable costing
	Amount	Amount
Sale(1000*8)		8000
Less: cost of production
Variable manufacturing cost(1400*4)	5600
Less: ending inventory(4000*4)	1600	4000
Gross contribution margin		4000
Less: sales commission (1000*1)		1000
Net contribution margin		3000
Less: fixed cost
Fixed manufacturing cost	700
Fixed marketing and administration cost	600	1300
Net income		1700