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

The Net income of the Income statement under the absorption costing equals Sh 14,000.

What is Direct materials?

= 1,000 x 10

= Sh 10,000

What is Direct labor?

= 1,000 x 7

= Sh 7,000

What is Variable manufacturing overhead?

= 1,000 x 3

= Sh 3,000

What is Fixed manufacturing overhead

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

= Sh 5,000

                                    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

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