Question

Company Q incurred manufacturing costs for the year as follows:

Direct materials Sh 10/unit

Direct labour sh 7/unit

Manufacturing overheads:

Variable sh 3/unit

Fixed Sh 7,500

Variable selling and administrative expenses sh 2,000

Fixed selling and administrative expenses sh 4,000

The company produced 1,500 units (the normal level of production) and sold 1,000 units at Sh 45 per unit. Assume that the production manager is paid a 15 per cent bonus based on the company’s net income.

Required:

(a) Prepare an income statement under absorption costing

Answer 1

Based on the manufacturing costs incurred by Company Q and the absorption costing method, the income statement would be:

                                                  Company Q

                                           Income Statement

Revenue (1,000 x 45)                                                      45,000

Cost of goods sold:

Direct materials                                        10,000

Direct labor                                                7,000

Variable Manufacturing overhead           3,000

Fixed manufacturing overhead               5,000            (25,000)

Gross Margin                                                                   20,000

Variable Selling and admin expenses     2,000

Fixed Selling and admin expenses          4,000

Total Selling and admin expenses                                (6,000)

Net Income                                                                       14,000

What are the variable and fixed costs?

Direct materials:

= 1,000 x 10

= Sh 10,000

Direct labor:

= 1,000 x 7

= Sh 7,000

Variable manufacturing overhead:

= 1,000 x 3

= Sh3,000

Fixed manufacturing overhead:

= 1,000 x (7,500 / 1,500)

= Sh 5,000

Cost of goods sold:

= 10,000 + 7,000 + 3,000 + 5,000

= Sh 25,000

Find out more on absorption costing at https://brainly.com/question/26276034.

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