Exercise 11-16A (Algo) Variable costing versus absorption costing LO 11-4Gibson Company incurred manufacturing overhead cost for the year as follows. Direct materials$38.10/unitDirect labor$26.80/unitManufacturing overhead Variable$10.90/unitFixed ($19.00/unit for 1,200 units)$22,800 Variable selling and administrative expenses$5,390 Fixed selling and administrative expenses$15,900 The company produced 1,200 units and sold 700 of them at $182.00 per unit. Assume that the production manager is paid a 2 percent bonus based on the company’s net income. RequiredPrepare 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?

Absorption costing refers to a method of accounting where all costs in relation to the production of a product are considered whether the product is sold or not. Variable costing is a method of accounting which considers only the variable overhead and excludes fixed overheads from production cost of the product and includes fixed overhead in the period cost.Abosrption costing Cost of goods sold Particulars Amt($)/unit Direct materials 38.10 Direct labour 26.80 Variable manufacturing overhead 10.90 Fixed manufacturing overhead 19 Total 94.8 Income statement Particulars Amt($) Sales 127,400 Less: variable expenses Cost of goods sold (66,360) Variable selling and admin expenses (5,390) Contribution margin 55,650 Less: Fixed expenses Fixed selling and admin expenses (15,900) Net income 39,750 Variable costing Cost of goods sold Particulars Amt($)/unit Direct materials 38.10 Direct labour 26.80 Variable manufacturing overhead 10.90 Total 75.80 Income statement Particulars Amt ($) Sales 127,400 Less: Variable expenses Variable cost of good sold (53,060) Variable selling and administrative expense (5,390) Contribution margin 68,950 Less: Fixed expenses Fixed manufacturing overhead (22,800) Fixed selling and administrative expense (15,900) Net income 30,250 Manager’s bonus @ 2% Particulars Amt($) Absorption costing 795 Variable costing 605 Approach recommended Variable costing

Answered: Exercise 11-16A (Algo) Variable costing…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Exercise 11-16A (Algo) Variable costing versus absorption costing LO 11-4

Gibson Company incurred manufacturing overhead cost for the year as follows.


Direct materials	$	38.10	/unit
Direct labor	$	26.80	/unit
Manufacturing overhead
Variable	$	10.90	/unit
Fixed ($19.00/unit for 1,200 units)	$	22,800
Variable selling and administrative expenses	$	5,390
Fixed selling and administrative expenses	$	15,900

The company produced 1,200 units and sold 700 of them at $182.00 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?

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