Question

A business operated at 100% of capacity during its first month, with the following results: Sales (90 units) $90,000 Production costs (100 units): Direct materials $40,000 Direct labor 20,000 Variable factory overhead 2,000 Fixed factory overhead 7,000 69,000 Operating expenses: Variable operating expenses $8,000 Fixed operating expenses 1,000 9,000 The amount of operating income that would be reported on the absorption costing income statement is a.$18,200 b.$27,900 c.$21,000 d.$18,900

Answer 1

d.$18,900

Step-by-step explanation:

Gross Profit is the net of Sales value and production cost in the period for the units sold. Under absorption costing all the direct and indirect costs incurred in the production of products are included in the total production cost. As the cost is available for 100 units produced we need to calculate the cost of 90 unit and deduct this cost from the sales value to determine the gross profit and then deduct the operating expenses to calculate the operating income.

Sales (90 units) $90,000

Less: Production costs:

Direct materials ( $40,000 x 90/100 ) $36,000

Direct labor ( 20,000 x 90/100 ) $18,000

Variable factory overhead ( 2,000 x 90/100 ) $1,800

Fixed factory overhead ( 7,000 x 90/100 ) $6,300

Total Production cost ($62,100)

Gross Profit $27,900

Less Operating expenses:

Variable operating expenses $8,000

Fixed operating expenses $1,000

($9,000)

Operating Income $18,900