Question

Exercise 19-12 Absorption costing and overproduction LO C1

Jacquie Inc. reports the following annual cost data for its single product.

Normal production and sales level		74,000	units
Sales price	$	57.40	per unit
Direct materials	$	10.40	per unit
Direct labor	$	7.90	per unit
Variable overhead	$	12.40	per unit
Fixed overhead	$	1,198,800	in total

Complete the below table using absorption costing. (Round cost per unit answers to 2 decimal place.)

Production volume Cost of goods sold: 74,000 units 108,000 units Cost of goods sold per unit Number of units sold Total cost of goods sold Jacquie Inc. Income statement through gross margin Sales volume 74,000 units 74,000 units If Jacquie increases its production to 108,000 units, while sales remain at the current 74,000 unit level, by how much would the company’s gross margin increase or decrease under absorption costing? Assume the company has idle capacity to double current production. Number of units sold Change in fixed overhead cost per unit Change in cost of goods sold:

Answer 1

Jacquie Inc.
Income statement through gross margin
Particulars	Amount in $	Amount in $
Production in Units	74,000	108,000
Sales @ $57.40	$4247,600	$4247,600
Material @ $10.40	769,600	1123,200
Direct Labour @ $7.90	584,600	853,200
Viriable MOH @ $12.40	917,600	1339,200
Variable cost of goods available for sale	2271,800	3315,600
Fixed MOH	1198,800	1198,800
Total cost of goods available for sale	3470,600	4514,400
Less-Closing inventory (($4514400/$108000)*34000 U)	0	1421,200
Cost of goods sold	3470,600	3093,200
Gross margin (Sales- cost of goods sold)	$777,000	$1154,400

Summarised Information-

Particulars	Amount in $	Amount in $
Production in Units	74,000 Units	1,08,000 Units
Cost of goods sold	$34,70,600	$30,93,200
Number of units sold	$74,000	$74,000
Cost of goods sold per unit	$46.90	$41.80
Cost of goods sold	$34,70,600	$30,93,200

If Jacquie increases its production to 108,000 units, while sales remain at the current 74,000 unit level, company’s gross margin under absorption costing will increase =377,400 (1154400-777000), due to economies to scale (more utilization of fixed cost due to increase in production)

Number of units sold=74000 Units,

Change in fixed overhead cost per unit=$5.1 ($16.2-$11.1)

Change in cost of goods sold=$377,400,

Please mention your doubts in the comment box, if any.

Thanks.