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# What are the benefits of the two methods?

What are the benefits of the two methods?

I. Write a paper of no more than 350 words after completing Exercise 19-17 in WileyPLUS in which you respond to the following questions:
• In this case, would it be better to use the variable or absorption costing method, and why?
• What are the benefits of the two methods?
• Which method would lead to the best decision when a competitor is submitting a lower bid for your product?
• Compute product cost and prepare an income statement under variable and absorption costing.

• Polk Company builds custom fishing lures for sporting goods stores. In its first year of operations, 2012, the company incurred the following costs.
Variable Cost per Unit
Direct materials    \$7.50
Direct labor    \$2.45
Variable selling and administrative expenses    \$3.90
Fixed Costs per Year
Fixed selling and administrative expenses \$240,100

• Polk Company sells the fishing lures for \$25. During 2012, the company sold 80,000 lures and produced 95,000 lures.
• Instructions
(a) Assuming the company uses variable costing, calculate Polk’s manufacturing cost per unit for 2012.
(b) Prepare a variable costing income statement for 2012.
(c) Assuming the company uses absorption costing, calculate Polk’s manufacturing cost per unit for 2012.
(d) Prepare an absorption costing income statement for 2012.

a) Using variable costing, Polk’s manufacturing cost per unit consists of direct materials (\$7.50), direct labor (\$2.45), and variable overhead (\$5.75) = \$15.70 per unit.

Variable Costing Per Unit Cost
Direct Materials 7.5
Direct Labor 2.45
Per Unit Cost \$ 15.70

b)
Polk Company
Income Statement Variable costing
Revenue(NNN) NNN-NNNN
Direct Costs 796000
Gross Profit 744000

less Variable selling 312000
Fixed Selling 240100
Net Income -42750

c) Using absorption costing, Polk’s manufacturing cost per unit consists of direct materials (\$7.50), direct labor (\$2.45), variable overhead (\$5.75) and fixed overhead, which equates to (234,650 / 95,000) = \$2.47 per unit. This gives a total manufacturing cost per unit of \$18.17.

Absorption Costing Per Unit Cost
Direct Materials 7.5
Direct Labor 2.45
Per Unit Cost \$ 18.17

FO = 234,650 / 95,000

d)
Polk Company
Income Statement Absorption Costing
Revenue(NNN) NNN-NNNN
Direct Costs 796000