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, 2014, are as follows: $$\begin{array} { l r }
\text { Direct materials } & \$ 4.00 \text { per unit } \
\text { Direct labor } & \$ 8.00 \text { per unit } \
\text { Variable manufacturing overhead } & \$ 20,000 \text { per month } \
\text { Fixed manufacturing overhead } & \$ 14,000 \text { per month } \
\text { Operating expenses } & \$ 21,000 \text { per month } \
& \
\text { Beginning inventory } & 0 \text { units } \
\text { Units produced } & 8,000 \text { units } \
\text { Units sold } & 7,500 \text { units } \
\text { Ending inventory } & 500 \text { units }
\end{array}$$ 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, 2014, are as follows: $$\begin{array} { l r } 
\text { Direct materials } & \$ 4.00 \text { per unit } \
\text { Direct labor } & \$ 8.00 \text { per unit } \
\text { Variable manufacturing overhead } & \$ 20,000 \text { per month } \
\text { Fixed manufacturing overhead } & \$ 14,000 \text { per month } \
\text { Operating expenses } & \$ 21,000 \text { per month } \
& \
\text { Beginning inventory } & 0 \text { units } \
\text { Units produced } & 8,000 \text { units } \
\text { Units sold } & 7,500 \text { units } \
\text { Ending inventory } & 500 \text { units }
\end{array}$$ Using absorption costing, how much is the net operating income for April?

Quizplus · Accepted Answer

Under absorption costing, all manufacturing costs (fixed and variable) are included in the cost of goods sold. 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