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Preparing variable and absorption costing income statements, and identifying pros and cons
Mp3 Musico Co. manufactures mp3 players. The company had beginning inventory of 1,000 mp3 players. These players had $30 each in variable costs per player and $2 each in fixed manufacturing costs per player. The following data are from the company’s production records for two months of 2011:
June 2011 July 2011
Direct materials cost per mp3 player $5.00 $5.00
Direct labor cost per mp3 player $14.00 $14.00
Variable manufacturing overhead cost per mp3 player $10.00 $10.00
Total fixed manufacturing overhead costs $70,000 $70,000
Total fixed selling and administrative costs $20,000 $20,000
Number of mp3 players produced 35,000 40,000
Number of mp3 players sold 34,800 40,300
Sale price per mp3 player $40 $40

1. Assuming the FIFO cost flow, compute the product cost mp3 player produced under absorption costing and under variable costing

2. Prepare a monthly income statement for June and July, using: A. absorption costing. B. Variable costing.

3. Is operating income higher under absorption costing or variable costing in June? In July? Give two reasons why and explain the pattern of differences in operating income based on absorption costing versus variable costing.