During the current period, 10,000 units were produced and 12,000 units were sold. Fixed manufacturing costs incurred amounted to $120,000. The fixed manufacturing cost per unit was the same as in the previous period. An absorption costing income statement would report fixed manufacturing costs as which of the following?
A) Costs of $144,000 as a deduction from gross profit to obtain operating income
B) Overhead of $120,000 as a deduction from sales revenue to obtain gross profit
C) Cost of goods sold of $144,000 as a deduction from sales revenue to obtain gross profit
D) Costs of $120,000 as a deduction from sales revenue to obtain contribution margin

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing costs are allocated to the units produced. Since 12,000 units were sold and the fixed manufacturing cost per unit remains the same, the total fixed manufacturing cost allocated to the sold units would be higher than the $120,000 incurred, due to the additional units sold over those produced. This results in a cost of goods sold of $144,000 being deducted from sales revenue to obtain gross profit.

During the Current Period, 10,000 Units Were Produced and 12,000