Final answer:
An income statement using absorption costing includes both variable and fixed manufacturing costs in the product costs. By increasing production and storing excess inventory, a company may report a temporary increase in income due to the distribution of fixed costs over a larger number of units, which decreases the cost of goods sold per unit.
Step-by-step explanation:
To prepare an income statement using absorption costing, we need to consider both variable and fixed manufacturing costs as part of the cost of production. When production exceeds sales, as with the production of 25,875 tons and sales of 20,700 tons, the excess inventory (5,175 tons) absorbs some of the fixed costs. This action can result in a higher total income reported for the period because fixed manufacturing costs are spread over more units, reducing the cost per unit sold.
Let's build a simplified example:
- Total revenues would be based on the units sold, 20,700 tons in this case, multiplied by the sales price per ton.
- Total costs would include both variable and fixed costs allocated to the units sold.
- Any unsold inventory would be valued at the full absorption cost and would be listed as an asset on the balance sheet.
The income statement would show a gross profit, calculated as total revenue minus cost of goods sold. If fixed costs are significant and by increasing production the cost per unit is reduced, then it could result in a temporary increase in reported income due to the inventory buildup.
Accounting profit can be calculated in a self-check question, where a firm had sales revenue of $1 million and spent $600,000 on labor, $150,000 on capital, and $200,000 on materials. The profit would be the difference between the sales and the total costs (sum of labor, capital, and material costs), which in this case would be $50,000.