Question

Question: Preparing absorption costing income statements, production exceeds sales

Refer to Exercise E21-16.

Requirements:

1. Prepare the April income statement using absorption costing.
2. Determine the product cost per unit and the total cost of the 1,000 cases in Finished Goods Inventory as of April 30.
3. Is the April 30 balance in Finished Goods Inventory higher or lower than variable costing? Explain why

Short answer

Answer

1. Operating income is $111,000
2. The total unit product cost is $16 and the finished goods inventory is $16,000.
3. Higher because unit product cost under absorption costing includes a fixed cost.

Step-by-step solution

Income statement using absorption costing (1)

Particulars	Amount
Net sales revenue ($29x12,000)	$348,000
Less: Cost of goods sold (($9+$7)x12,000)	$192,000
Gross profit	$156,000
Less: Selling and administrative cost
Variable selling and administrative cost ($3x12,000)	$36,000
Fixed selling and administrative cost	$9,000
Operating Income	$111,000

Calculation of product cost per unit and total cost of 1,000 cases in finished goods inventory as of April 30 (2).

Particulars	Amount
Variable manufacturing cost	$9
Fixed manufacturing cost ($91,000/13,000)	$7
Total unit product cost	$16
Finished goods inventory (1,000x$16)	$16,000

Difference between April 30 balance as per absorption and variable costing (3).

April 30 balance in Finished Goods Inventory is higher than variable costing because absorption costing includes fixed manufacturing overhead in total unit product cost.