Direct materials

$4.00 per unit

Direct labor

$3.00 per unit

Variable manufacturing overhead

$2.00 per unit

Variable selling and administrative costs

$1.00 per unit

Fixed manufacturing overhead

$25,000

Fixed selling and administrative costs

$10,000

During 2012, Preferred produced 5,000 units out of which 4,600 units were sold for $30 each.

  • Calculate Preferred's net operating income assuming the company uses absorption costing.
  • Expert Answers

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    The difference between variable costing and absorption costing is that the fixed manufacturing overhead is included as a product cost under absorption costing.

    So, in order to employ absorption costing, we have to compute a per unit production cost, including the fixed manufacturing cost.

    The expenses here are:

    direct materials:...

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    The difference between variable costing and absorption costing is that the fixed manufacturing overhead is included as a product cost under absorption costing.

    So, in order to employ absorption costing, we have to compute a per unit production cost, including the fixed manufacturing cost.

    The expenses here are:

    direct materials: $4/unit

    direct labor: $3/unit

    variable manufacturing overhead: $2/unit

    variable selling and administrative costs: $ 1/unit

    fixed manufacturing overhead: $25,000

    So, because absorption costing includes this $25,00 cost in the calculation of the per unit cost, and because 5,000 units were sold, the per unit cost using absorption costing is

    $10+$5 = $15

    fixed selling and administrative costs: $10,000

    The equation for net operating income under absorption costing is:

    net sales revenue - costs of good sold - selling and administrative costs = operating income.

    So, we have:

    (4,600 units * $30/unit) - (4,600 units * $15/unit) - ($10,000 fixed selling and administrative costs) = $59,000 operating income.

    Approved by eNotes Editorial Team