Question

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Compute net operating income under absorption costing based on the following data.

Unit cost for direct materials                                   $10
Unit cost for direct labor                                            15
Unit cost for variable manufacturing overhead           7
Unit variable selling and administrative expense       2

Total fixed manufacturing overhead                      $100,000

Total fixed selling and administrative expense          80,000

Units in beginning inventory                                0

Units produced                                            25,000
Units sold                                                    22,000

Unit selling price                                               $70

Answer 1

Calculation of Net operarating income under absorption costing

Sales (22,000 units x $70)		$1,540,000
Cost of Goods Sold:
Beginning inventoy	$0
Add: Cost of Goods manufactured - 25,000 units [Note -1]	$900,000
Cost of goods avaibale for sale	$900,000
Less: Closing inventoy - 3,000 units [Note -2 & 3]	$108,000	$792.000
Gross profit		$748,000
Less: Selling and administrative expenses
Variable selling and administrative expenses [22,000 units x $2 per unit]	$44,000
Fixed selling and administrative expenses	$80,000	$124,000
Net Operating Income		$624,000

Note 1

Cost of goods manufactured:

= Direct Material + Direct labor + Variable manufacturing Overhead + Fixed manufacturing Overhead

= [($10 + $15 + $7) x 25,000] + $100,000

= $900,000

Note 2:

Closing Inventory quantity

Closing Inventoy = Open. inventory + Inventory manufactured during the year - Inventory sold

  = nil + 25,000 units - 22,000 units

= 3,000 units

Note 3

Cost of closing inventory:

Cost of manufacturig of 25,000 units = $900,000

Cost of manufacturing of 3,000 units = (3,000 units ÷ 25,000 units) x $900,000 = $108,000