Andréa's Bakery produces frozen pizzas, which it sells for $10 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 Andréa's Bakery first two months in business:
| Variable manufacturing expense per pizza | $6 | $6 |
| Sales commission expense per pizza | $1.50 | $1.50 |
| Total fixed manufacturing overhead | $1,050 | $1,050 |
| Total fixed marketing and administrative expenses | $900 | $900 |
Required:
| 1. | Compute the product cost per meal produced under absorption costing and under variable |
costing.
Do this first for July and then for August.
| 2. | Prepare separate monthly income statements for July and for August, using (a) absorption |
costing
and (b) variable costing.
| 3. | Is operating income higher under absorption costing or variable costing in July? In August? |
Explain
the pattern of differences in operating income based on absorption costing versus variable costing.
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