Question

Houston, Inc., planned and actually manufactured 200,000 units of its single product in 2017, its first year of operation. The variable manufacturing cost was $24 per unit produced. The variable operating (nonmanufacturing) cost was $9 per unit sold. Planned and actual fixed manufacturing costs were $600,000.Planned and actual fixed operating (nonmanufacturing) costs totaled $370,000. Houston sold 100,000 units of a product at $45 per unit.

Houston?s 2017 operating income using absorption costing is
(a) $530,000
(b) $230,000
(c) $600,000
(d) $900,000
(e) none of these

Answer 1

(a) $530,000

Step-by-step explanation:

Sales = 100,000 units for $45 per unit = $4,500,000

Less: Cost of Goods Sold

Cost of manufacturing = 100,000 units for $27 per unit = $2,700,000

Variable cost at $24 per unit

Fixed
`(600,000)/(200,000) = 3` per unit

Gross income = $1,800,000

Less: Non Manufacturing Expense

Variable = 100,000 units at $9 per unit = $900,000

Fixed = $370,000

Total Non manufacturing expense = $1,270,000

Operating Income as per absorption costing = $1,800,000 - $1,270,000 = $530,000

Under absorption costing method everything expect the non manufacturing fixed expense are consumed on per unit basis, but fixed non manufacturing fixed expense are completely absorbed as are not incurred for manufacturing thus, not charged to finished goods but only to goods sold.