Paton Company incurred manufacturing overhead cost for the year as
Paton Company incurred manufacturing overhead cost for the year as follows.
Direct materials ............. $40/unit
Direct labor ................ $28/unit
Manufacturing overhead
Variable ................. $12/unit
Fixed ($20/unit for 1,500 units) ....... $30,000
Variable selling and admin. expenses ..... $ 8,400
Fixed selling and admin. expenses ....... $16,000
The company produced 1,500 units and sold 1,200 of them at $180 per unit. Assume that the production manager is paid a 2 percent bonus based on the company’s net income.

Required
a. Prepare an income statement using absorption costing.
b. Prepare an income statement using variable costing.
c. Determine the manager’s bonus using each approach. Which approach would you recommend for internal reporting and why?

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