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?

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?

All spots in the chart have to be filled out please.

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

Income Statement under Absorption Costing: Sales revenue (1200 units *225) 270000 Less: Cost of Goods sold material (1500 *50) 75000 Labour (1500*35) 52500 variable Mfg Oh (1500*15) 22500 Fixed Mfg Oh 37500 Cost of Goods manufactured 187500 Less: Ending Inventory 37500 (Cost per unit@187500/1500 i.e. 125 *300 units) Cost of Goods sold 150,000 Gross Margin 120,000 Less: Selling and admin oh variable Selling oh 10500 Fixed Selling OH 20000 30500 Net income 89,500 Income statement under Variable Costing: Sales revenue (1200 units *225) 270000 Less: Variable Cost of Goods sold material (1500 *50) 75000 Labour (1500*35) 52500 variable Mfg Oh (1500*15) 22500 Cost of Goods manufactured 150,000 Less: Ending Inventory 30000 (Cost per unit@150,000/1500 i.e. 100 *300 units) Variable Cost of goods sold 120,000 Variable Selling expense 10,500 Contribution margin 139,500 Less: Fixed cost Fixed Manufacturing OH 37500 Fixed Selling OH 20000 57500 Net income 82,000 Manager bonus under both costing: Absorption costing (89500*2%) 1790 Variable Costing (82,000*2%) 1640 For internal reporting purposes, Variable costing approach must be followed.

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