Boston , Inc., planned and actually manufactured 260,000 units of its single product in 2017 , its first year of operation. Variable manufacturing cost was $ 17 per unit produced. Variable operating (nonmanufacturing) cost was $ 7 per unit sold. Planned and actual fixed manufacturing costs were $ 780,000. Planned and actual fixed operating (nonmanufacturing) costs totaled $ 350,000. Boston sold 140,000 units of product at $43 per unit.

Boston's 2017 operating income using absorption costing is:

a) $530,000 b) $370,000 c) $740,000 d) $900,000 e) None of these.

Show supporting calculations.

b) $370,000

Explanation:

Absorption costing requires that the fixed manufacturing overheads to be absorbed in the product cost using appropriate cost driving activity.

As 2017 is the first year of operation then there will be no beginning inventory.

First Calculate the Product cost

Sales (140,000 x $43) $6,020,000

Variable manufacturing cost $2,380,000

($17 x 140,000)

Manufacturing Fixed cost $780,000

Cost of Goods Sold ($3,160,000)

Gross Income $2,860,000

Variable operating cost ($7 x 140,000) ($980,000)

Fixed operating cost ($350,000)

Net Income $1,530,000

Given Data is Inconsistent with the options,

Following answer is made according to similar correct question

Absorption costing requires that the fixed manufacturing overheads to be absorbed in the product cost using appropriate cost driving activity.

As 2017 is the first year of operation then there will be no beginning inventory.

First Calculate the Product cost

Sales (180,000 x $44) $7,920,000

Variable manufacturing cost $4,680,000

($26 x 180,000)

Manufacturing Fixed cost $520,000

Cost of Goods Sold ($5,200,000)

Gross Income $2,720,000

Variable operating cost ($11 x 180,000) ($1,980,000)

Fixed operating cost ($370,000)

Net Income $370,000