Cornerstone Exercise 2.

3 Absorption Costing, Value of Ending Inventory,

Operating Income

Pattison Products, Inc.

Required:

1. Cost of each unit using absorption costing

Direct materials $5.00

Direct labor 3.00
Variable overhead 1.50
Fixed overhead 7.00
Total cost $16.50

2. Units in ending inventory = Units, beginning inventory + Units produced – Units

sold
Units in ending inventory = 0 + 40,000 – 38,400
Units in ending inventory = 1,600 units

Using absorption costing:

Cost of ending inventory = 1,600 units x $16.50
Cost of ending inventory = $26,400
3. Income statement of Pattison Products, Inc using absorption costing.

Pattison Products, Inc.

Absorption-Costing
Income Statement for the Month of October

Percent of sales
Sales ($24 × 38,400) $921,600 100.00%
Less: Cost of goods sold ($16.50 × 38,400) 633,600 68.75%
Gross profit $288,000 31.25%
Less:
Variable marketing expenses ($1.20 × 38,400) (46,080) (5.00%)
Fixed marketing and administrative expenses (130,500) (14.16%)
Operating income $111,420 12.09%

4. Units in ending inventory = Units, beginning inventory + Units produced – Units

sold
Units in ending inventory = 1,600 + 40,000 – 41,000
Units in ending inventory = 600 units
 Using absorption costing:
Cost of ending inventory = 600 units x $16.50
Cost of ending inventory = $9,900

Pattison Products, Inc.

Absorption-Costing
Income Statement for the Month of November

Percent of sales
Sales ($24 × 41,000) $984,000 100.00%
Less: Cost of goods sold ($16.50 × 41,000) 676,500 68.75%
Gross profit $307,500 31.25%
Less:
Variable marketing expenses ($1.20 × 41,000) (49,200) (5.00%)
Fixed marketing and administrative expenses (130,500) (14.16%)
Operating income $127,800 12.99%

 The new operating income for the month of November is $127,800.