Last year, Walsh Company manufactured 25,000 units and sold 22,000 units. Production costs were as follows:
$\begin{array}{|l|r|}
\hline \text { Direct materials } & \$ 100,000 \
\hline \text { Direct labour } & 75,000 \
\hline \text { Variable manufacturing overhead } & 50,000 \
\hline \text { Fixed manufacturing overhead } & 75,000 \
\hline
\end{array}$Total sales were $440,000, total variable selling and administrative expenses were $110,000, and total fixed selling and administrative expenses were $45,000. There was no beginning inventory. Assume that direct labour is a variable cost.

-What was the operating income under absorption costing?
A) $2,000.
B) $9,000.
C) $12,000.
D) $21,000.

Question

Last year, Walsh Company manufactured 25,000 units and sold 22,000 units. Production costs were as follows:
$\begin{array}{|l|r|}
\hline \text { Direct materials } & \$ 100,000 \
\hline \text { Direct labour } & 75,000 \
\hline \text { Variable manufacturing overhead } & 50,000 \
\hline \text { Fixed manufacturing overhead } & 75,000 \
\hline
\end{array}$Total sales were $440,000, total variable selling and administrative expenses were $110,000, and total fixed selling and administrative expenses were $45,000. There was no beginning inventory. Assume that direct labour is a variable cost.

-What was the operating income under absorption costing?
A) $2,000.
B) $9,000.
C) $12,000.
D) $21,000.

Quizplus · Accepted Answer

Under absorption costing, all manufacturing costs (direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead) are included in the cost of the product. The cost of goods sold (COGS) under absorption costing is calculated as follows:1. Total production costs = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $100,000 + $75,000 + $50,000 + $75,000 = $300,000.2. Cost per unit = Total production costs / Number of units produced = $300,000 / 25,000 units = $12 per unit.3. COGS = Cost per unit * Number of units sold = $12 * 22,000 units = $264,000.Operating income is calculated as follows:1. Gross Margin = Sales - COGS = $440,000 - $264,000 = $176,000.2. Operating Income = Gross Margin - (Variable selling and administrative expenses + Fixed selling and administrative expenses) = $176,000 - ($110,000 + $45,000) = $176,000 - $155,000 = $21,000.

Last Year, Walsh Company Manufactured 25,000 Units and Sold 22,000