Freshmart, Inc., began operations last year when it produced and sold the same number of units. This year, the company produced 1,000 units and sold 750 units at a selling price of $100 per unit. Fixed overhead costs totaled $30,000 and fixed selling and administrative expenses were $15,000. Variable production costs were $25.00 per unit while variable selling and administrative expenses were $10.00 per unit. Using absorption costing, net income was:

Net Income under absorption costing is $11,250.

Explanation:

Absorption Costing Income Statement.

Sales Revenue (750 units × $100)                                                        $75,000

Less Cost of Sales

Opening Inventory                                                                     $0

Add Cost of Goods Manufactured (1,000 units × $55.00) $55,000

Less Closing Inventory (250 units × $55.00)                      ($13,750)($41,250)

Gross Profit                                                                                            $33,750

Less Expenses :

Selling and administrative expenses :

Fixed                                                                                                     ($15,000)

Variable (750 units×$10.00)                                                                  ($7,500)

Net Income / (Loss)                                                                                $11,250

Conclusion :

Manufacturing costs under absorption costing include both fixed and variable costs.

All Non-manufacturing costs are treated as period costs, expense during the period.

Net Income under absorption costing is $11,250.

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