Assume that the company uses an absorption costing system that assigns $19 of direct labor cost and $55 of fixed manufacturing overhead to each unit that is produced. The net operating income under this costing system is:
A)$1,321,000
B)$1,225,000
C)$1,395,000
D)$1,340,000

Question

Quizplus · Accepted Answer

Under absorption costing, net operating income is calculated as follows:
Sales - Cost of Goods Sold (direct materials + direct labor + variable manufacturing overhead + fixed manufacturing overhead)

Sales = 10,500 x $160 = $1,680,000
Direct materials = $40 x 10,500 = $420,000
Direct labor = $19 x 10,500 = $199,500
Variable manufacturing overhead = $8 x 10,500 = $84,000
Fixed manufacturing overhead = $55 x 10,500 = $577,500

Cost of Goods Sold = $420,000 + $199,500 + $84,000 + $577,500 = $1,281,000

Therefore, net operating income is: $1,680,000 - $1,281,000 = $399,000
However, the question asks for the net operating income per unit, so we need to divide the total net operating income by the number of units produced:

Net operating income per unit = $399,000 ÷ 10,500 = $38

Therefore, the net operating income under this costing system is $1,281,000 + ($38 x 10,500) = $1,395,000. The correct answer is C.

Assume That the Company Uses an Absorption Costing System That