Question

A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price -------------------------------------- $126

Units in beginning inventory ------------------- 0

Units produced ----------------------------------  8,500

Units sold ----------------------------------------- 8,300

Units in ending inventory ---------------------    200

Variable costs per unit:

   Direct materials -------------------------------  $36

   Direct labor ------------------------------------  $52

   Variable manufacturing overhead ---------   $2

   Variable selling and administrative -------   $9

Fixed costs:

   Fixed manufacturing overhead ----------- $127,500

   Fixed selling and administrative ----------    91,300

What is the net operating income for the month under absorption costing?

	a.	$5,300
	b.	$3,000
	c.	($12,700)
	d.	$8,300

Answer 1

d.

$8,300 Working: Under Absorbtion costing, fixed manufacturing overhead is treated as product cost.It means fixed maufacturing overhead is assigned to each unit. Fixed Manufacturing overhead per unit = $       1,27,500 /         8,500 = $    15.00 Now, unit cost of goods sold is calculated as follows: Direct Materials $          36 Direct Labor $          52 Variable Manufactturing overhead $             2 Fixed Manufacturing Overhead $          15 Cost of goods sold $        105 Now, Net Operating income is calculated as follows: Per Unit Total Sales $        126 $     10,45,800 Cost of goods sold $        105 $       8,71,500 Gross Profit $          21 $       1,74,300 Selling and admnistrative expense: Variable $       9.00 $           74,700 Fixed $           91,300 Net Operating Income $             8,300