Question

Rundle Company incurred manufacturing overhead cost for the year as follows.

Direct materials	$	39.20	/unit
Direct labor	$	28.00	/unit
Manufacturing overhead
Variable	$	10.40	/unit
Fixed ($18.50/unit for 1,700 units)	$	31,450
Variable selling and administrative expenses	$	9,600
Fixed selling and administrative expenses	$	14,300

The company produced 1,700 units and sold 1,200 of them at $181.70 per unit. Assume that the production manager is paid a 2 percent bonus based on the company’s net income.

Required

1. Prepare an income statement using absorption costing.

2. Prepare an income statement using variable costing.

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

Answer 1

(a)-The income statement using absorption costing.

Rundle Company
Income Statement
(Absorption Costing)
Revenue [1,200 x $181.70]		218,040
Cost of goods sold
Direct materials [1,200 x $39.20]	47,040
Direct labor [1,200 x $28.00]	33,600
Variable Manufacturing overhead [1,200 x $10.40]	12,480
Fixed Manufacturing overhead [1,200 x $18.50]	22,200
Cost of goods sold		115,320
Gross Margin		102,720
Variable Selling and administrative expenses	9,600
Fixed Selling and administrative expenses	14,300
Total Selling and administrative expense		23,900
Net Income		78,820

(b)-The income statement using variable costing.

Rundle Company
Income Statement
(Variable Costing)
Revenue [1,200 x $181.70]		218,040
Cost of goods sold
Direct materials [1,200 x $39.20]	47,040
Direct labor [1,200 x $28.00]	33,600
Variable Manufacturing overhead [1,200 x $10.40]	12,480
Variable Selling and administrative expenses	9,600
Total variable costs		102,720
Contribution Margin		115,320
Fixed Costs
Fixed Manufacturing overhead	31,450
Fixed Selling and administrative expenses	14,300
Total Fixed costs		45,750
Net Income		69,570

(c)-Manager’s bonus using two approaches

Manager’s bonus using – (Absorption Costing approach) = $1,576.40 [$78,820 x 2.00%]

Manager’s bonus using – (Variable Costing approach) = $1,391.40 [$69,570 x 2.00%]