Dilia Company incurred manufacturing overhead cost for the year as follows: The

Question

Dilia Company incurred manufacturing overhead cost for the year as follows:

The company produced 1,500 units and sold 1,200 of them at $225 per unit. Assume that the production manager is paid a 2 percent bonus based on the company’s net income.

Required

Prepare an income statement using absorption costing.

Prepare an income statement using variable costing.

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

Direct materials $ 50 /unit Direct labor $ 35 /unit Manufacturing overhead Variable $ 15 /unit Fixed ($25/unit for 1,500 units) $ 37,500 Variable selling and administrative expenses $ 10,500 Fixed selling and administrative expenses $ 20,000

Explanation / Answer

Manager’s bonus using each approach:

Variable costing approach will be used for internal reporting as it helps in decision making.

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Absorption Costing variable costing Cost per Unit Direct Material 50 50 Direct Labour 35 35 Manufacturing overhead Variable 15 15 Fixed 25 0 Cost per Unit 125 100

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