Question

A business operated at 100% of capacity during its first month, with the following results: Sales...

A business operated at 100% of capacity during its first month, with the following results:

Sales (99 units) $534,600
Production costs (124 units):
   Direct materials $72,384
   Direct labor 18,481
   Variable factory overhead 32,342
   Fixed factory overhead 30,801 154,008
Operating expenses:
   Variable operating expenses $6,251
   Fixed operating expenses 3,704 9,955

The amount of gross profit that would be reported on the absorption costing income statement is

a. $401,687

b. $405,391

c. $411,642

d. $534,476

  1. On October 31, the end of the first month of operations, Morristown & Co. prepared the following income statement based on absorption costing:

    Morristown & Co.
    Absorption Costing Income Statement
    For the Month Ended October 31
    Sales (2,600 units) $117,000
    Cost of goods sold:
       Cost of goods manufactured $85,500
       Ending inventory (400 units) (11,400)
          Total cost of goods sold (74,100)
    Gross profit $42,900
    Selling and administrative expenses (21,500)
    Operating income $21,400

    If the fixed manufacturing costs were $42,900 and the variable selling and administrative expenses were $14,600, prepare an income statement using variable costing.

    Morristown & Co.
    Variable Costing Income Statement
    For the Month Ended October 31
    • Ending inventory
    • Fixed manufacturing costs
    • Sales
    • Variable cost of goods manufactured
    • Wages expense
    $
    Variable cost of goods sold:
    • Fixed selling and administrative expenses
    • Sales
    • Variable cost of goods manufactured
    • Variable cost of goods sold
    • Wages expense
    $
    • Ending inventory
    • Fixed selling and administrative expenses
    • Sales
    • Utilities expense
    • Variable cost of goods sold
    • Ending inventory
    • Fixed manufacturing costs
    • Total variable cost of goods sold
    • Utilities expense
    • Variable cost of goods manufactured
    • Ending inventory
    • Fixed manufacturing costs
    • Manufacturing margin
    • Utilities expense
    • Variable cost of goods manufactured
    $
    • Ending inventory
    • Fixed manufacturing costs
    • Variable cost of goods manufactured
    • Variable selling and administrative expenses
    • Wages expense
    • Contribution margin
    • Ending inventory
    • Fixed manufacturing costs
    • Variable cost of goods manufactured
    • Wages expense
    $
    Fixed costs:
    • Ending inventory
    • Fixed manufacturing costs
    • Sales
    • Variable cost of goods sold
    • Wages expense
    $
    • Ending inventory
    • Fixed selling and administrative expenses
    • Sales
    • Utilities expense
    • Variable cost of goods sold
    Operating income $

Homework Answers

Answer #1
1
Sales 534600
Less: Cost of goods sold 122958 =154008*99/124
Amount of gross profit 411642
Option C $411,642 is correct
2
Variable Costing Income Statement
For the Month Ended October 31
Sales 117000
Variable cost of goods sold:
Variable cost of goods manufactured 42600 =85500-42900
Ending inventory (5680) =42600*400/3000
Total variable cost of goods sold (36920)
Manufacturing margin 80080
Variable selling and administrative expenses (14600)
Contribution margin 65480
Fixed costs:
Fixed manufacturing costs 42900
Fixed selling and administrative expenses 6900 (49800)
Operating income 15680
The amounts can alternatively be written without parenthesis.
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