Question

Assume you are starting a new business involving the manufacture and sale of a new product. Raw materials costs are $45 per product. Direct labor costs are expected to be $25 per product, Manufacturing Overhead is expected to cost $18 per product. You expect to sell each product for $172. You plan to produce 120 products next month and expect to sell 85 products. During the second month, you plan to produce 120 products but expect sales in the month to be 110 products. During the third month you expect to produce 120 products but sell 135 products Prepare a production schedule (units & dollars), a raw materials and finished goods inventory schedule (units & dollars), and the top part of an income statement (sales, cost of goods sold and gross profit) for the three months.

Answer 1

1. Production schedule:

	Production Schedule
	Month 1	Cost of production per unit $88	Month 2	Cost of production $88	Month 3	Cost of production per unit $88
Planned Production	120 units	$10,560	120 units	$10,560	120 units	$10,560
Beginning inventory	0	0	35 units	$3,080	45 units	$3,960
total units available for sale	120 units	$10,560	155 units	$13,640	165 units	$14,520
Forecasted Sales	85 units	$7,480	110 units	$9,680	135 units	$11,880
Ending inventory	35 units	$3,080	45 units	$3,960	30 units	$2,640

Note –

Cost of production per unit:

Direct materials $45

Direct labor$25

Total cost of production = $88 per unit

Selling price per unit = $172

1. Raw materials and finished goods inventory schedule:

	Month 1	Month 2
Sales	85 units	110 units	135 units
Ending inventory	35 units	45 units	30 units
total	120 units	$155 units	165 units
less: beginning inventory	0	35 units	45 units
Purchase	$120 units	120 units	120 units
Cost of direct materials at $45	$5,400	$5,400	$5,400

Schedule of finished goods inventory:

Schedule of finished goods inventory
	Month 1	Month 2	Month 3
finished goods	35 units	45 units	30 units
total cost per unit	$3,080	$3,960	$2,640

1. Income statement showing gross profit for the three months:

Absorption Costing Income Statement
		Month 1			Month 2			Month 3
Sales (85 units)			14,620	Sales (110 units)			$18,920	Sales (135 units)			$23,220
Less: Cost of Goods Sold				Less: Cost of Goods Sold				Less: Cost of Goods Sold
Beginning inventory		$0		Beginning inventory	(35 x $88)	$3,080		Beginning inventory	(45 x $88)	$3,960
Add: cost of goods manufactured	(120 x $88)	$10,560		Add: cost of goods manufactured	(120 x 88)	$10,560		Add: cost of goods manufactured	(120 x 88)	$10,560
Goods Available for Sale		$10,560		Goods Available for Sale		$13,640		Goods Available for Sale		$14,520
Less: ending inventory	(35 x $88)	$3,080		Less: ending inventory	(45 units x $88)	$3,960		Less: ending inventory	30 units x $88)	$2,640
Cost of goods sold			$7,480	Cost of goods sold			$9,680	Cost of goods sold			$11,880
Gross Margin			$7,140	Gross Margin			$9,240	Gross Margin			$11,340