Hey everyone. Can someone help me understand how the COGS is calculated in the problem below? It looks like COGS is $8/unit but I have no idea where that is coming from.
Question:
Augusta, Inc., expects manufacturing and sales of 70,000 units of product Maggie, its only product, to occur evenly over a 10-week period. Augusta pays for materials in the week following use. The balance of accounts payable for materials at the beginning of the 10-week period is $40,000. There are no beginning inventories. The folÂlowing information pertains to product Maggie for the 10-week period:
Sales price $11 per unit
Materials $3 per unit
Manufacturing conversion costs—Fixed $210,000
Variable $2 per unit
Selling and administrative costs—Fixed $45,000
Variable $1 per unit
Actual results are as budgeted, except that 60,000 of the 70,000 units produced were sold. Using absorpÂtion costing, what is the difference between the reported income and the budgeted net income?
A.
$10,000
B.
$20,000
C.
$75,000
D.
$95,000
Correct Answer: B) $20,000
Explanation:
Absorption costing is a method of costing in which manufacturing fixed costs are treated as product costs and assigned to the units produced. Fixed costs follow the units through work-in-process and finished goods as an inventoriable cost and are expensed through cost of goods sold (COGS) when the units are sold.
Unit sales 60,000 70,000
Revenue $660,000 $770,000
Less COGS 480,000 560,000
——– ——–
Gross profit $180,000 $210,000
Less Fixed selling/admn. 45,000 45,000
Less Variable selling/admn. 60,000 70,000
——– ——–
Net profit $ 75,000 $ 95,000
The difference is pre-tax net income of $20,000 ($95,000 − $75,000).
.