A business operated at 100% of capacity during its first month, with the following results:Sales (115 units) $644,000Production costs (144 units): Direct materials$87,172 Direct labor22,257 Variable factory overhead38,949 Fixed factory overhead37,094185,472 Operating expenses: Variable operating expenses$5,284 Fixed operating expenses4,0749,358The amount of gross profit that would be reported on the absorption costing income statement isa.$643,856b.$495,880c.$490,596d.$486,522

Under absorption costing, fixed factory overhead is also a product cost and therefore included in the cost of goods sold along with variable manufacturing costs for number of the units sold. Solution: Sales (115 units) = 644,000 Cost of goods sold (115 units) = total product costs / total units produced * units sold = 185472/ 144 * 115 = $148,120 Gross profit reported on Absorption costing income statement = Sales - cost of goods sold = 644000 - 148120 = $495,880 Hence option "b" is correct.

Answered: A business operated at 100% of capacity…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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

Sales (115 units)		$644,000
Production costs (144 units):
Direct materials	$87,172
Direct labor	22,257
Variable factory overhead	38,949
Fixed factory overhead	37,094	185,472

Operating expenses:
Variable operating expenses	$5,284
Fixed operating expenses	4,074	9,358

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

a.$643,856

b.$495,880

c.$490,596

d.$486,522

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