Chapter 21, Problem S21A.23SE

To determine

Gross Profit margin under Absorption costing:

Under Absorption costing, the Unit product cost is computed on the fact that all the product cost including the fixed manufacturing cost shall be the part of unit product cost and will be used in the valuation of ending inventory of finished goods. Therefore, the proportionate fixed manufacturing cost is deducted from the sales revenue while computing the gross profit and remaining proportionate fixed product cost become part of ending inventory valuation.

The Gross margin under absorption costing is computed by computing the excess of sales revenue over the total product cost of the business including the proportionate fixed manufacturing cost of the business.

Then after computing the gross profit, the total selling and other administrative expense shall be deducted for the period to arrive at the amount of net operating income.

Gross profit under Absorption costing under various production and sales levels.