Allston Products sells a special kind of effects pedal for musical performers. Each unit sells for $20.00. Additional data for the month of April, 2011, are as follows:
$$\begin{array} { | l | r | r | }
\hline \text { Direct materials } & \$ 4.00 & \text { per unit } \
\hline \text { Direct labor } & \$ 8.00 & \text { per unit } \
\hline \text { Variable manuf. overhead } & \$ 20,000 & \text { per month } \
\hline \text { Fixed manuf. ovehead } & \$ 14,000 & \text { per month } \
\hline \text { Operating Experses } & \$ 21,000 & \text { per month } \
\hline & & \
\hline \text { Bepinging inventory } & 0 & \text { units } \
\hline \text { Units produced } & 8,000 & \text { units } \
\hline \text { Units sold } & 7,500 & \text { units } \
\hline \text { Ending inventory } & 500 & \text { units } \
\hline
\end{array}$$
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Using absorption costing, how much is the net operating income for April?

Question

Allston Products sells a special kind of effects pedal for musical performers. Each unit sells for $20.00. Additional data for the month of April, 2011, are as follows:
$$\begin{array} { | l | r | r | } 
\hline \text { Direct materials } & \$ 4.00 & \text { per unit } \
\hline \text { Direct labor } & \$ 8.00 & \text { per unit } \
\hline \text { Variable manuf. overhead } & \$ 20,000 & \text { per month } \
\hline \text { Fixed manuf. ovehead } & \$ 14,000 & \text { per month } \
\hline \text { Operating Experses } & \$ 21,000 & \text { per month } \
\hline & & \
\hline \text { Bepinging inventory } & 0 & \text { units } \
\hline \text { Units produced } & 8,000 & \text { units } \
\hline \text { Units sold } & 7,500 & \text { units } \
\hline \text { Ending inventory } & 500 & \text { units } \
\hline
\end{array}$$
-
Using absorption costing, how much is the net operating income for April?

Quizplus · Accepted Answer

Under absorption costing, all manufacturing costs (both variable and fixed) are included in the cost of the product. The cost per unit is $4 (materials) + $8 (labor) + $2.50 (variable overhead per unit, $20,000/8,000 units) + $1.75 (fixed overhead per unit, $14,000/8,000 units) = $16.25. The cost of goods sold for 7,500 units is $16.25 * 7,500 = $121,875. Sales revenue is $20 * 7,500 = $150,000. Gross profit is $150,000 - $121,875 = $28,125. Subtracting operating expenses of $21,000 gives a net operating income of $7,125.

Allston Products Sells a Special Kind of Effects Pedal for Musical