Question 2 Gia\'s Foods produces frozen meals, which it sells for $8 each. The c

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Question 2 Gia's Foods produces frozen meals, which it sells for $8 each. The company computes a new monthly fixed manufacturing overhead rate based on the planned number of meals to be produced that month. All costs and production levels are exactly as planned. The following data are from Gia's Foods first month in business. January 2007 es 1,000 Production Variable manufacturing cost per meal Sales commission cost per meal Total fixed manufacturing overhead Total fixed marketing and administrative costs 1,400 meals $4.00 $1.00 $700 $600 Requirements: i) Compute the product cost per meal produced under absorption costing and under ii) Prepare the income statement for January 2007 using variable costing variable costing. ) List three situations in which marginal costing, as a technique, aids decision-making.

Explanation / Answer

i) Absorption Costing Variable Costing Variable manufacturing cost per meal $                4.00 $             4.00 Fixed manufacturing overhead cost = 700/1400 = $                0.50 Total manufacturing cost $                4.50 $             4.00 ii) INCOME STATEMENT USING VARIABLE COSTING: Sales = 1000*8 = 8000 Variable expenses: Variable manufacturing cost = 1000*4 = 4000 Sales commission = 1000*1 = 1000 Total variable expenses 5000 Contribution margin 3000 Less: Fixed costs: Manufacturing 700 Marketing and administration 600 Total fixed expenses 1300 Net operating income 1700 iii) Situations in which marginal costing aids in decision making: *Make or buy decision *Further processing of a product *Deciding optimal product mix

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