Question

Cool Sky reports the following costing data on its product for its first year of operations. During this first year, the company produced 44,000 units and sold 36,000 units at a price of $140 per unit.

Manufacturing costs
Direct materials per unit $60
Direct labor per unit $22
Variable overhead per unit $8
Fixed overhead for the year $528,000
Selling and administrative costs
Variable selling and administrative cost per unit $11
Fixed selling and administrative cost per year $105,000

Required:
Assume the company uses absorption costing. Prepare its income statement for the year under absorption costing.

Answer 1

Answer and Explanation:

The preparation of the income statement using absorption costing is as follows:

Sales (36,000 units at $140) $5,040,000

Less: Cost of goods sold

Direct materials (36,000 units at $ 60) $2,160,000

Direct labor (36,000 units at $22) $792,000

Variable overhead (36,000 units at $8) $288,000

Fixed Overhead (36,000 units at $12) $432,000

Cost of goods sold $3,672,000

Gross margin $1,368,000

Less:

Selling, general and administrative expenses:

Variable selling and administrative expenses (36,000 x $11) $396,000

Fixed selling and administrative expenses $105,000

Net income (loss) $867,000