Question

Houston​,​Inc., planned and actually manufactured 200,000 units of its single product in

2017​, its first year of operation. Variable manufacturing cost was $ 24 per unit produced. Variable operating​ (nonmanufacturing) cost was $9 per unit sold. Planned and actual fixed manufacturing costs were $600,000.Planned and actual fixed operating​ (nonmanufacturing) costs totaled $370,000. Houston sold 100,000 units of product at $ 45 per unit

Houston’s 2017 operating income using absorption costing is​

(a) $530,000​,

​(b) $230,000​,

​(c) $600,000​,

(d) $900,000,

(e) none of these. Show supporting calculations.

Absorption costing

Revenues   4500000

Cost of goods sold:

Beginning inventory 0

Variable manufacturing costs

Allocated fixed manufacturing costs 600,000

Cost of goods available for sale

Deduct ending inventory

Cost of goods sold

Gross margin

Variable operating costs

Fixed operating costs

Operating income

Answer 1

Solution

Houston Inc

Absorption costing income statement:

Houston Inc
Absorption Costing Income Statement
Sales (100,000 units at $45)		$4,500,000
Less: Cost of Goods Sold
Beginning inventory	0
Add: cost of goods manufactured	(200,000 x $27)	$5,400,000
Goods Available for Sale		$5,400,000
Less: ending inventory	100,000 x 27	$2,700,000
Cost of goods sold		$2,700,000
Gross Margin		$1,800,000
Less: selling and administrative expenses
Variable	$900,000(100,000 x$9)
Fixed	$370,000	$1,270,000
Net income		$530,000

Hence, Houtson’s 2017 operating income using absorption costing is $530,000

Note:

Cost of goods sold –

Variable manufacturing cost per unit              $24

Fixed manufacturing cost per unit      $600,000/200,000 units = $3

Total cost of goods manufactured per unit     $24 + $3 = $27