Question

s Hot Stuff began making hot and sour soup in August, 2012. The soup sells for $2 for alarge package. Variable production costs are $0.70 per package. Roberta's Hot Stuff incursmonthly fixed manufacturing overhead costs of $40,000 and fixed selling and administrative costof $8,000. On August 31, 2012 ending inventory was 10,000 soup packages. Assume Roberta'sHot Stuff produced 400,000 soup packages in September. Roberta's Hot Stuff sold 406,000 of the soup packages in September. Calculate the September net income using absorption costing.

A. $479,800

B. 479,200

C. 527,800

D. 487,200

Answer 1

Ans.	Option B. $479200
	Unit product cost: (under absorption costing):
	Variable production cost	0.7
	Fixed manufacturing overhead (40000/400000)	0.1
	Total unit product cost	0.8
	Absorption costing Income statement
	Particulars		Amount
	Sales (406000*2)		812000
	Less: Cost of goods sold:
	Opening inventory (10000*0.80)	8000
	Add: Cost of goods manufactured (400000*0.8)	320000
	Cost of goods available for sale	328000
	Less: Ending inventory [(400000+10000-406000)*0.8]	-3200	324800
	Gross profit		487200
	Less: Fixed Selling and Administrative expenses		-8000
	Net operating income		479200
	*Ending inventory for August is equal to the beginning inventory of September.
	*Fixed manufacturing overhead cost per unit = Total fixed manufacturing expenses / No. of units produced
	*Ending inventory units = Beginning inventory + Units produced - units sold