Question

Exercise 6-15 Absorption Costing Unit Product Cost and Income Statement [LO6-1, LO6-2] Chuck Wagon Grills, Inc., makes a single product—a handmade specialty barbecue grill that it sells for $210. Data for last year’s operations follow: Units in beginning inventory 0 Units produced 20,000 Units sold 19,000 Units in ending inventory 1,000 Variable costs per unit: Direct materials $ 50 Direct labor 80 Variable manufacturing overhead 20 Variable selling and administrative 10 Total variable cost per unit $ 160 Fixed costs: Fixed manufacturing overhead $ 700,000 Fixed selling and administrative 285,000 Total fixed costs $ 985,000 Required: 1. Assume that the company uses absorption costing. Compute the unit product cost for one barbecue grill. 2. Assume that the company uses absorption costing. Prepare an income statement.

Answer 1

1. Assume that the company uses absorption costing. Compute the unit product cost for one barbecue gril

Direct material	50
Direct labour	80
Variable manufacturing overhead	20
Fixed manufacturing overhead (700000/20000)	35
Unit product cost	185

2. Assume that the company uses absorption costing. Prepare an income statement.

Sales (19000*210)	3990000
Less: Cost of goods sold (19000*185)	(3515000)
Gross margin	475000
Less: Selling and administrative expense (19000*10+285000)	(475000)
Net operating income	0