Question

Advanced Company reports the following information for the current year. All
beginning inventory amounts equaled $0 this year

Units produced this year 40,000 units
Units sold this year 24,000 units
Direct materials $ 24 per unit
Direct labor $ 26 per unit
Variable overhead $ 3 per unit
Fixed overhead $ 200,000 in total

Given Advanced Company's data, and the knowledge that the product is sold for $80
per unit and operating expenses are $350,000, compute the net income under absorption
costing.

A) $98,000
B) $80,000
C) $178,000
D) $298,000
E) $296,800

Answer 1

Answer:
Income statement under absorption costing ($)
Sales revenue ($80 x 240,00 units)	$1,920,000
Less: cost of goods sold	($1,472,000)
Gross Profit	$448,000
Less : operating expenses	($350,000)
Net operating income ($)	$98,000
From given options, option (A) is correct, i.e., $98,000
Cost per unit of finished goods under absorption costing
Direct material cost ($24 x   40,000 units)	$960,000
Total direct labour ($26 x   40,000 units)	$1,040,000
Total variable overhead ($3 x 40,000 units)	$120,000
Total fixed overhead	$200,000
	$2,320,000
cost per unit ($2,320,000 / 40,000 units)	$58 per unit
No. of units of finished goods = 40,000 (-) 24,000 = 16,000 Cost of Finished goods = No. of Finished goods x cost of production per unit                                                 =      16,000 x ($24 +$26 +$3)                                                 =   $848,000 Cost of goods sold =   $2,320,000 (-) $848,000                                        =   $1,472,000