Mario's Foods produces frozen meals, which it sells for $ 8 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:
January February
Sales
1,400 meals
1,600 meals
Production
2,000 meals
1,400 meals
Variable manufacturing expense per meal
$ 4
$ 4
Sales commission expense per meal
$ 1
$ 1
Total fixed manufacturing overhead
$ 700
$ 700
Total fixed marketing and administrative expenses
$ 400
$ 400
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.

Explanation:

absorption COSTING

January:

Product Cost per meal = Variable Manufacturing Expenses per meal + Fixed Manufacturing Overhead per meal

Product Cost per meal = $4 + $700/2,000 =$4+$0.35

Product Cost per meal = $4.35

February:

Product Cost per meal = Variable Manufacturing Expenses per meal + Fixed Manufacturing Overhead per meal

Product Cost per meal = $4 + $700/1,400  = $4+$0.5

Product Cost per meal = $4.50

VARIABLE COSTING

January:

Product Cost per meal = Variable Manufacturing Expenses per meal

Product Cost per meal = $4

February:

Product Cost per meal = Variable Manufacturing Expenses per meal

Product Cost per meal = $4

2)

Absorption costing income statement

January

Sales 11200[1400*8]

Less:COGS (6090) [1400*4.35]

GP 5110

Less: Sales comission expense (1400) [1*1400]

Less: Marketing and adm expense (400)

Net Operating Income 3310

Absorption costing income statement

February

Sales 12800[1600*8]

Less:COGS (7200) [1600*4.50]

GP 5600

Less: Sales comission expense (1600) [1*1600]

Less: Marketing and adm expense (400)

Net Operating Income 3600

Variable costing income statement

January

Sales 11200

Less: Variable expenses

Variable COGS (5600)   [4*1400]

Variable sales comission expense (1400)

Total variable expenses (7000)

Contribution margin 4200

Less: Fixed expenses

Fixed manufacturing overhead (700)

Fixed Marketing and adm expense (400)

Total fixed expenses (1100)

Net Operating income 3100

Variable costing income statement

February

Sales 12800

Less: Variable expenses

Variable COGS (6400)   [4*1600]

Variable sales comission expense (1600)

Total variable expenses (8000)

Contribution margin 4800

Less: Fixed expenses

Fixed manufacturing overhead (700)

Fixed Marketing and adm expense (400)

Total fixed expenses (1100)

Net Operating income 3700

the correct answer is b.)

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