Case 5-27 (continued)
4 a. The unit product costs under absorption costing:
Year 1
Year 2
Year 3
Direct materials ………………………………
$30
$30
$30.00
Direct labor ……………………………………
18
18
18.00
Variable manufacturing overhead ……….
6
6
6.00
Fixed manufacturing overhead …………..
*6
**8
***7.50
Absorption costing unit product cost ……
$60
$62
$61.50
* $600,000 ÷ 100,000 units = $6 per unit.
** $600,000 ÷ 75,000 units = $8 per unit.
*** $600,000 ÷ 80,000 units = $7.50 per unit.
4 b. The absorption costing income statements appears below (LIFO):
Year 1
Year 2
Year 3
Sales ……………………………………………..
$5,600,000
$6,300,000
$5,250,000
Cost of goods sold…………………………….
4,800,000
5,550,000
4,612,500
Gross margin …………………………………..
800,000
750,000
637,500
Selling and administrative expenses ……..
500,000
540,000
480,000
Net operating income ………………………..
$ 300,000
$ 210,000
$ 157,500
Cost of goods sold computations:
Year 1: 80,000 units × $60 per unit = $4,800,000
Year 2: (75,000 units × $62 per unit) + (15,000 units × $60 per unit) = $5,550,000
Year 3: 75,000 × $61.50 per unit = $4,612,500
