Question

Chuck Wagon Grills, Inc., makes a single product—a handmade specialty barbecue grill that it sells for $215. Data for last year’s operations follow:

Units in beginning inventory		0
Units produced		10,400
Units sold		9,300
Units in ending inventory		1,100
Variable costs per unit:
Direct materials	$	64
Direct labor		30
Variable manufacturing overhead		14
Variable selling and administrative		17
Total variable cost per unit	$	125
Fixed costs:
Fixed manufacturing overhead	$	343,200
Fixed selling and administrative		525,000
Total fixed costs	$	868,200

Required:

1. Assume that the company uses absorption costing. Compute the unit product cost for one barbecue grill.

2. Assume that the company uses absorption costing. Prepare an income statement for last year.

Answer 1

1. Computation of Unit Product Cost under Absorption Costing:-

	Absorption Costing
Direct Materials	$64
Direct Labor	30
Variable Manufacturing Overhead	14
Fixed Manufacturing Overhead	33
Total Unit Product Cost	$141

Fixed Manufacturing Overhead per unit=(Fixed Manufacturing Overhead/Units Produced)

=($343,200/10,400)

=$33

2. Preparing Income Statement using Absorption Costing:-

Chuck Wagon Grills, Inc.

Absorption Costing Income Statement

Accounts	Amount	Amount
Sales Revenue (9,300 units×$215)	$1,999,500
Less:- Cost of Goods Sold (9,300 units×$141)	(1,311,300)
Gross Profit		$688,200
Less:- Selling and Administrative Expenses
Variable Selling and Administrative Expenses (9,300 units ×$17)	$158,100
Fixed Selling and Administrative Expenses	525,000
Total Selling and Administrative Expenses		$(683,100)
Net Income		$5,100