Simple
step-by-step example – taken from http://accountinginfocus.com/tag/absorption-costing/
The Traditional (Absorption Costing) Income
Statement
The traditional income statement uses absorption costing to
create the income statement. This income statement looks at costs by dividing
costs into product and period costs. In order to complete
this statement correctly, make sure you understand product and period costs.
The
format for the traditional income statement is:
Let’s use the example from
the absorption and variable costing post to
create this income statement.
When
doing an income statement, the first thing I always do is calculate the cost
per unit. Under absorption costing, the cost per unit is direct materials,
direct labor, variable overhead, and fixed overhead. In this case, fixed
overhead per unit is calculated by dividing total fixed overhead by the number
of units produced (see absorption costing post for details).
Once you have the cost per unit, the rest of the statement is
fairly easy to complete. All variable items are calculated based on the number
of units sold. This includes sales, cost of goods sold, and the variable piece
of selling and administrative expenses. The matching principle states that we
must match revenue with expenses. Therefore, we can only expense the cost of
the units that are sold. The units that are not sold end up in inventory.
Start
with sales. Take your price per unit and multiply it by the number of units
sold.
Sales
= Price x Number of units sold
Sales = $100 X 8,000
Sales
= $800,000
Using
the cost per unit that we calculated previously, we can calculate cost of goods
sold by multiplying the cost per unit by the number of units sold.
Cost
of goods sold = Cost per unit x Number of units sold
Cost
of goods sold = $48.80 X 8,000
Cost
of goods sold = $390,400
Calculate
gross profit by subtracting cost of goods sold from sales.
Selling
and administrative expenses can be variable or fixed. Therefore, you should
treat the selling and administrative costs like a mixed cost.
In this case, the variable rate is $5 per unit and the fixed cost is $112,000.
Write your cost formula and plug in the number of units sold for the activity.
Total
selling and administrative expense = $5 X 8,000 + $112,000
Total
selling and administrative expense = $40,000 + $112,000
Total
selling and administrative expense = $152,000
Last
but not least, calculate the operating income by subtracting selling and
administrative expenses from gross profit.
Final Thoughts
Having a solid grasp of product
and period costs makes this statement a lot easier to do.
Calculate unit cost first as that is probably the hardest part of the
statement. Once you have the unit cost, the rest of the statement if fairly
straight forward.
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