Question

Tec Industries manufactures and sells one product. The following information pertains to each of the company’s first two years of operations:

Variable costs per unit: Manufacturing: Direct Materials $ 35 Direct Labor $ 25 Variable manufacturing overhead $ 7 Variable Selling and administrative $ 5 Fixed costs per year: Fixed manufacturing overhead $ 320,000 Fixed selling and administrative expenses $ 125,000

During its first year of operations, BIA produced 40,000 units and sold 30,000 units. During its second year of operations, BIA produced 40,000 and sold 50,000 units. The selling price of the company’s product is $100 per unit.

2) Assume the company uses Absorption Costing.

a. Compute the unit product cost for Year 1 and Year 2.

b. Prepare an income statement for Year 1 and Year 2 using Absorption Costing.

PLEASE SHOW ALL WORK!!

Answer 1

Solution a:

Computation of Unit Product Cost - Absorption Costing
Particulars	Year 1	Year 2
Unit Product Cost:
Direct material	$35.00	$35.00
Direct Labor	$25.00	$25.00
Variable manufacturing overhead	$7.00	$7.00
Fixed manufacturing overhead ($320,000 /40000)	$8.00	$8.00
Unit Product Cost	$75.00	$75.00

Solution b:

Income Statement - Absorption Costing - Tec Industries
Particulars	Year 1	Year 2
	Amount	Amount
Sales (Units sold*$100)	$30,00,000	$50,00,000
Cost of Goods Sold:
Cost of goods produced (40000*$75)	$30,00,000	$30,00,000
Add: Beginning Inventory (10000*$75)	$0	$7,50,000
Less: Ending Inventory (10000*$75)	$7,50,000	$0
Cost of Goods Sold	$22,50,000	$37,50,000
Gross Profit	$7,50,000	$12,50,000
Variable Selling & Administrative Expenses (Units sold*$5)	$1,50,000	$2,50,000
Fixed Selling & Administrative Expenses	$1,25,000	$1,25,000
Net Operating Income	$4,75,000	$8,75,000