Question

Dilia Company incurred manufacturing overhead cost for the year as follows:

Direct materials	$	50	/unit
Direct labor	$	35	/unit
Manufacturing overhead
Variable	$	15	/unit
Fixed ($25/unit for 1,500 units)	$	37,500
Variable selling and administrative expenses	$	10,500
Fixed selling and administrative expenses	$	20,000

The company produced 1,500 units and sold 1,200 of them at $225 per unit. Assume that the production manager is paid a 2 percent bonus based on the company’s net income.

Required

Prepare an income statement using absorption costing.

Prepare an income statement using variable costing.

Determine the manager’s bonus using each approach. Which approach would you recommend for internal reporting?

Answer 1

Solution:

Income Statement - Absorption Cosing - Dilia Company
Particulars	Details	Amount
Sales		$270,000.00
Cost of Goods Sold:
Cost of goods produced	$187,500.00
Add: Opening Inventory	$0.00
Less: Ending Inventory	$37,500.00	$150,000.00
Gross Profit		$120,000.00
Variable Selling & Administrative Expenses		$10,500.00
Fixed Selling & Administrative Expenses		$20,000.00
Net Operating Income		$89,500.00

Manager's Bonus = $89,500 * 2% = $1,790

Variable costing income statement - Dilia Company
Particulars	Details	Amount
Sales	1200*$225	$270,000.00
Variable Cost:
Variable manufacturing cost	1200*$100	$120,000.00
Variable Selling and Administrative Expenses		$10,500.00
Contribution		$139,500.00
Fixed Manufacturing Overhead		$37,500.00
Fixed Selling & Administrative Expenses		$20,000.00
Net Income		$82,000.00

Manager's Bonus = $82,000 * 2% = $1,640

For internal reporting i would recommend variable costing apporach.