Cool Sky reports the following costing data on its product for its first year of operations. During this first year, the company produced 44,000 units and sold 36,000 units at a price of $140 per unit. Manufacturing costs
Direct materials per unit $60
Direct labor per unit $22
Variable overhead per unit $8
Fixed overhead for the year $528,000
Selling and administrative costs
Variable selling and administrative cost per unit $11
Fixed selling and administrative cost per year $105,000

Required:
Assume the company uses absorption costing. Prepare its income statement for the year under absorption costing.

Answer and Explanation:

The preparation of the income statement using absorption costing is as follows:

Sales (36,000 units at $140)                                         $5,040,000

Less: Cost of goods sold

Direct materials (36,000 units at $ 60)  $2,160,000

Direct labor (36,000 units at $22)  $792,000

Variable overhead (36,000 units at $8)  $288,000

Fixed Overhead (36,000 units at $12)  $432,000

Cost of goods sold                                                              $3,672,000

Gross margin                                                                       $1,368,000

Less:

Selling, general and administrative expenses:

Variable selling and administrative expenses (36,000 x $11)  $396,000

Fixed selling and administrative expenses                        $105,000

Net income (loss)                                                                   $867,000

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