January 2018 Units produced and sold: Sales 1,000 meals Production 1,200 meals Variable manu'acturing cost per meal Sales commission cost per meal Total fixed manufacturing overhead Total fixed selling and administrative costs 660 500

January 2018 Units produced and sold: Sales 1,000 meals Production 1,200 meals Variable manu'acturing cost per meal Sales commission cost per meal Total fixed manufacturing overhead Total fixed selling and administrative costs 660 500

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter15: Managing Short-term Assets

Section: Chapter Questions

Problem 15PROB

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Concept explainers

Pricing

Pricing is used as a term in finance and economics, pricing is the process of fixing a value for a product or a service. Pricing establishes a value for a product or service that the customer has to pay. A business can choose from different strategies while deciding to set prices.

Question

Preparing variable and absorption costing income statements

Linda’s Foods produces frozen meals that it sells for $7 each. The company computes a new monthly fixed manufacturing overhead allocation rate based on the planned number of meals to be produced that month. Assume all costs and production levels are exactly as planned. The following data are from Linda’s Foods’s first month in business:

Requirements

Compute the product cost per meal produced under absorption costing and under variable costing.
Prepare income statements for January 2018 using:

- absorption costing.
- variable costing.

3. Is operating income higher under absorption costing or variable costing in January?

January 2018
Units produced and sold:
Sales
1,000 meals
Production
1,200 meals
Variable manu'acturing cost per meal
Sales commission cost per meal
Total fixed manufacturing overhead
Total fixed selling and administrative costs
660
500

Definition Definition Indirect costs incurred while producing goods or services. Overhead costs cannot be directly attributed to products or services. Overhead includes indirect material cost, indirect labor cost, rent, utilities expenses, and depreciation. Since these costs directly affect the profitability of a company, managing overhead becomes an important task for management.

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