Exercise 11-16A Variable costing versus absorption costing LO 11-4

Dilia Company incurred manufacturing overhead cost for the year as follows:

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

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 companys net income.

Required

A Prepare an income statement using absorption costing.

B Prepare an income statement using variable costing.

C Determine the managers bonus using each approach. Which approach would you recommend for internal reporting?

Prepare an income statement using absorption costing.

DILIA COMPANY
Income Statement
(Absorption Costing)
Cost of goods sold
		0
		$0
		$0

Prepare an income statement using variable costing.

DILIA COMPANY
Income Statement
(Variable Costing)
Cost of goods sold
		0
		$0
		$0

Determine the managers bonus using each approach. Which approach would you recommend for internal reporting?

Absorption costing
Variable costing
Which approach is recommended?