Question

Gibson Manufacturing pays its production managers a bonus based on the company’s profitability. During the two most recent years, the company maintained the same cost structure to manufacture its products.

Year	Units Produced			Units Sold
Production and Sales
Year 2		4,000			4,000
Year 3		6,000			4,000
Cost Data
Direct materials				$	13.50	per unit
Direct labor				$	22.90	per unit
Manufacturing overhead—variable				$	11.10	per unit
Manufacturing overhead—fixed				$	102,600
Variable selling and administrative expenses				$	8.00	per unit sold
Fixed selling and administrative expenses				$	58,000

(Assume that selling and administrative expenses are associated with goods sold.)

Gibson sells its products for $109.50 per unit.

Required

1. Prepare income statements based on absorption costing for Year 2 and Year 3.

Year 2 :

Costs of Goods Sold:

*All left side columns must be filled*

Year 3:

Costs of goods sold

^All left side columns must be filled^

Answer 1

Year 2

Income statement

Sales (4,000 x 109.50)		438,000
Cost of goods sold :
Direct material (4,000 x 13.50)	54,000
Direct labor (4,000 x 22.90)	91,600
Manufacturing overhead - Variable (4,000 x 11.10)	44,400
Manufacturing overhead - Fixed	102,600
Cost of goods sold		-292,600
Gross profit		145,400
Variable selling and administrative expenses (4,000 x 8)		-32,000
Fixed selling and administrative expenses		-58,000
Net operating income		$55,400

Year 3

Income statement

Sales (4,000 x 109.50)		438,000
Cost of goods sold :
Direct material (6,000 x 13.50)	81,000
Direct labor (6,000 x 22.90)	137,400
Manufacturing overhead - Variable (6,000 x 11.10)	66,600
Manufacturing overhead - Fixed	102,600
	387,600
Ending inventory (387,600 x 2,000/6,000)	-129,200
Cost of goods sold		-258,400
Gross profit		179,600
Variable selling and administrative expenses (4,000 x 8)		-32,000
Fixed selling and administrative expenses		-58,000
Net operating income		$89,600

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