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


Fixed selling and administrative costs


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

  1. 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: $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.

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