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allatin County Motors Inc. assembles and sells snowmobile engines. The company began operations on July 1 and operated at 100% of capacity during the first month. The following data summarize the results for July: Sales (4,000 units) $2,600,000 Production costs (4,350 units): Direct materials$1,218,000 Direct labor522,000 Variable factory overhead87,000 Fixed factory overhead130,500 1,957,500 Selling and administrative expenses: Variable selling and administrative expenses$60,000 Fixed selling and administrative expenses25,000 85,000 a. Prepare an income statement according to the absorption costing concept.

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Answer:

Sales                                                                                                   2,600,000

Less Cost of Goods Sold

Opening Stock                                                              0

Add Cost of Goods Manufactured

Direct materials                                                     1,218,000

Direct labor                                                             522,000

Variable factory overhead                                       87,000

Fixed factory overhead                                           130,500

Less Closing Stock (350×(1,957,500/4,350)       (157,500)             (1,800,000)

Gross Profit                                                                                           800,000

Less Expenses

Selling and administrative expenses:

Variable selling and administrative expenses                                     (60,000)

Fixed selling and administrative expenses                                          (25,000)

Net Income                                                                                              715,000

Explanation:

Product Cost (Absorption Costing) = Direct Materials + Direct Labor + Variable Overhead + Fixed Overheads

Period Cost (Absorption Costing)  = All Non- Manufacturing Overheads

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