Question

Jason's Meals produces frozen​ meals, which it sells for $9 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 exactly as planned. The following data are from the​ company's first two months in​ business: 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.

January February

sales.............................. 1,200 meals 1,600 meals

production...................... 1,600 meals 1,500 meals

Variable manufacturing expense per meal $4 $4

Sales commission expense per meal $ 1 $1

Total fixed manufacturing over head $1,200 $1,200

Total fixed marketing and administrative expense $900 $900

Answer 1

1.

	January		February
	Absorption Costing	Variable Costing	Absorption Costing	Variable Costing
Variable manufacturing expense	4.00	4.00	4.00	4.00
Fixed manufacturing overhead	0.75		0.80
Product cost per meal $	4.75	4.00	4.80	4.00

Fixed manufacturing overhead:

January = $1200/1600 meals = $0.75

February = $1200/1500 meals = $0.80

2a.

Jasons' Meals
Income Statement (Absorption Costing)
Month Ended
	January	February
Sales revenue	10800	14400
Less: Cost of goods sold	5700	7680
Gross margin	5100	6720
Less: Sales commission expense	1200	1600
Fixed marketing and administrative expense	900	900
Net operating income	3000	4220

2b.

Jasons' Meals
Contribution Margin Income Statement (Variable Costing)
Month Ended
	January	February
Sales revenue	10800	14400
Less: Variable expenses
Variable cost of goods sold	4800	6400
Sales commissions	1200	1600
Total variable expense	6000	8000
Contribution margin	4800	6400
Less: Fixed manufacturing overhead	1200	1200
Fixed marketing and administrative expense	900	900
Total fixed expenses	2100	2100
Net operating income	2700	4300

3. In January, absorption costing operating income exceeds variable costing income. This is because units produced were greater than units sold. Absorption costing defers some of January's fixed manufacturing overhead costs in the units of ending inventory. These costs will not be expensed until those units are sold. Deferring these fixed manufacturing overhead costs to the future increases January's absorption costing income.

In February, absorption costing operating income is less than variable costing operating income. This is because units produced were less than units sold for the month. As inventory declines, as was the case in this February, January's fixed manufacturing overhead costs that absorption costing assigned to that inventory are expensed in February. This decreases February's absorption costing income.