Louie's Meals produces frozen meals, which it sells for $7 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 inbusiness: January February Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jan 1,600 meals Feb 1,900 meals Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jan 2,000 meals Feb 1,600 meals Variable manufacturing expense per meal. . . . . . . . . . Jan $4 Feb $4 Sales commission expense per meal. . . . . . . . . . . . . . Jan $1 Feb $1 Total fixed manufacturing overhead. . . . . . . . . . . . . Jan $800 Feb $800 Total fixed marketing and administrative expenses. . Jan $300 Feb $300 Requirement 1. Compute the product cost per meal produced under absorption costing and under variable costing. Do this first for January and then for February. January Absorption Variable costing costing Total product cost February Absorption Variable costing costing Requirement 2a. Prepare separate monthly income statements for January and for February, using absorption costing. Louie's Meals Income Statement (Absorption Costing) Month Ended January 31 Febuary 28 Less: Less: Requirement 2b. Prepare Louie's Meals' January and February income statements using variable costing. Louie's Meals Contribution Margin Income Statement (Variable Costing) Month Ended January 31 February 28 Less: Less: Requirement 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. In January, absorption costing operating income ▼ equals exceeds is less than variable costing income. This is because units produced were ▼ equal to greater than less than units sold. Absorption costing defers some of ▼ January's February's ▼ fixed manufacturing overhead nonmanufacturing variable manufacturing overhead costs in the units of ending inventory. These costs will not be ▼ capitalized expensed paid for in cash until those units are sold. Deferring these ▼ fixed manufacturing overhead nonmanufacturing variable manufacturing overhead costs to the future ▼ increases decreases January's absorption costing income. In February, absorption costing operating income ▼ equals exceeds is less than variable costing operating income. This is because units produced were ▼ equal to greater than less than units sold for the month. As inventory ▼ increases declines , as was the case in this February, January's ▼ fixed manufacturing overhead nonmanufacturing variable manufacturing overhead costs that absorption costing assigned to that inventory are expensed in ▼ January February . This ▼ increases decreases February's absorption costing income.

Louie's Meals produces frozen meals, which it sells for $7 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 inbusiness: January February Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jan 1,600 meals Feb 1,900 meals Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jan 2,000 meals Feb 1,600 meals Variable manufacturing expense per meal. . . . . . . . . . Jan $4 Feb $4 Sales commission expense per meal. . . . . . . . . . . . . . Jan $1 Feb $1 Total fixed manufacturing overhead. . . . . . . . . . . . . Jan $800 Feb $800 Total fixed marketing and administrative expenses. . Jan $300 Feb $300 Requirement 1. Compute the product cost per meal produced under absorption costing and under variable costing. Do this first for January and then for February. January Absorption Variable costing costing Total product cost February Absorption Variable costing costing Requirement 2a. Prepare separate monthly income statements for January and for February, using absorption costing. Louie's Meals Income Statement (Absorption Costing) Month Ended January 31 Febuary 28 Less: Less: Requirement 2b. Prepare Louie's Meals' January and February income statements using variable costing. Louie's Meals Contribution Margin Income Statement (Variable Costing) Month Ended January 31 February 28 Less: Less: Requirement 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. In January, absorption costing operating income ▼ equals exceeds is less than variable costing income. This is because units produced were ▼ equal to greater than less than units sold. Absorption costing defers some of ▼ January's February's ▼ fixed manufacturing overhead nonmanufacturing variable manufacturing overhead costs in the units of ending inventory. These costs will not be ▼ capitalized expensed paid for in cash until those units are sold. Deferring these ▼ fixed manufacturing overhead nonmanufacturing variable manufacturing overhead costs to the future ▼ increases decreases January's absorption costing income. In February, absorption costing operating income ▼ equals exceeds is less than variable costing operating income. This is because units produced were ▼ equal to greater than less than units sold for the month. As inventory ▼ increases declines , as was the case in this February, January's ▼ fixed manufacturing overhead nonmanufacturing variable manufacturing overhead costs that absorption costing assigned to that inventory are expensed in ▼ January February . This ▼ increases decreases February's absorption costing income.

Name: Louie's Meals produces frozen meals, which it sells for $7 each. The
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Description: Louie's Meals produces frozen meals, which it sells for $7 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

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter2: Basic Cost Management Concepts

Section: Chapter Questions

Problem 22E: Ellerson Company provided the following information for the last calendar year: During the year,...

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Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Jan 1,600 meals

Feb 1,900 meals

Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Jan 2,000 meals

Feb 1,600 meals

Variable manufacturing expense per meal. . . . . . . . . .

Jan $4

Feb $4

Sales commission expense per meal. . . . . . . . . . . . . .

Jan $1

Feb $1

Total fixed manufacturing overhead. . . . . . . . . . . . .

Jan $800

Feb $800

Total fixed marketing and administrative expenses. .

Jan $300

Feb $300

Requirement 1. Compute the product cost per meal produced under absorption costing and under variable costing. Do this first for January and then for February.

	January
	Absorption	Variable
	costing	costing
Total product cost

	February
	Absorption	Variable
	costing	costing

Requirement 2a. Prepare separate monthly income statements for January and for February, using absorption costing.

Louie's Meals

Income Statement (Absorption Costing)

Month Ended

	January 31	Febuary 28

Less:

Less:

Requirement 2b. Prepare

Louie's Meals'

January and February income statements using variable costing.

Louie's Meals

Contribution Margin Income Statement (Variable Costing)

Month Ended

	January 31	February 28

Less:



Less:

Requirement 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.

In January, absorption costing operating income

▼

equals

exceeds

is less than

variable costing income. This is because units produced were

▼

equal to

greater than

less than

units sold.

Absorption costing defers some of

▼

January's

February's

▼

fixed manufacturing overhead

nonmanufacturing

variable manufacturing overhead

costs in the units of ending inventory. These costs will not be

▼

capitalized

expensed

paid for in cash

until those units are sold. Deferring these

▼

fixed manufacturing overhead

nonmanufacturing

variable manufacturing overhead

costs to the future

▼

increases

decreases

January's absorption costing income.

In February, absorption costing operating income

▼

equals

exceeds

is less than

variable costing operating income. This is because units produced were

▼

equal to

greater than

less than

units sold for the month.

As inventory

▼

increases

declines

as was the case in this February, January's

▼

fixed manufacturing overhead

nonmanufacturing

variable manufacturing overhead

costs that absorption costing assigned to that inventory are expensed in

▼

January

February

This

▼

increases

decreases

February's absorption costing income.

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