A business operated at 100% of capacity during its first month, with the following results: Sales (110 units) $660,000 Production costs (138 units): Direct materials $89,507 Direct labor 22,853 Variable factory overhead 39,992 Fixed factory overhead 38,088 190,440 Operating expenses: Variable operating expenses $5,766 Fixed operating expenses 4,136 9,902 The amount of gross profit that would be reported on the absorption costing income statement is a.$508,200 b.$498,298 c.$502,434 d.$659,862
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
A business operated at 100% of capacity during its first month, with the following results:
| Sales (110 units) | $660,000 | |
| Production costs (138 units): | ||
| Direct materials | $89,507 | |
| Direct labor | 22,853 | |
| Variable factory |
39,992 | |
| Fixed factory overhead | 38,088 | 190,440 |
| Operating expenses: | ||
| Variable operating expenses | $5,766 | |
| Fixed operating expenses | 4,136 | 9,902 |
The amount of gross profit that would be reported on the absorption costing income statement is
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