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Absorption costing: develop a cost of goods manufactured summary & income statement

This management accounting problem explores absorption costing in a manufacturing setting.

From the data that follow from a fictitious manufacturing example, develop a Cost of Goods Manufactured Summary and a brief Absorption Costing Income Statement.


Sales: 50,000 units @ $20/unit

Actual Costs:

Direct Materials $2.00/unit
Direct Labor $2.50/unit
Variable overhead $2.50/unit
Fixed overhead $2.00/unit

1: primary costs (traceable to specific cost object)
2: conversion costs (direct labor, overhead, variable, and fixed costs)

Variable selling $2.00/unit
Advertising $100,000
Administrative $50,000
Inventory levels (Finished Goods)
Beginning inventory 0 units
Ending inventory 10,000 units
* No inventories of Work In Progress (WIP) to report


Solution Preview

Cost of Goods Manufactured
(Absorption Costing Method)

Direct Materials
60,000 units X $2.00 = $120,000
Direct Labor
60,000 units X $3.00 = $180,000
Variable Overhead
60,000 units X ...

Solution Summary

The solution explains and presents the cost of goods manufactured using absorption costing followed by a simple income statement using the calculated amounts.