Gabuat Corporation, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $ 148 Units in beginning inventory 0 Units produced 3,500 Units sold 3,050 Units in ending inventory 450 Variable costs per unit: Direct materials $ 51 Direct labor $ 28 Variable manufacturing overhead $ 5 Variable selling and administrative expense $ 7 Fixed costs: Fixed manufacturing overhead $ 70,000 Fixed selling and administrative expense $ 27,450 The total gross margin for the month under the absorption costing approach is:

The total gross margin for the month under the absorption costing approach is$ 125200

Explanation:

Gabuat Corporation,

Income Statement

Absorption Costing

Sales                $ 148 * 3050 = $ 451400

Less Cost of Goods Sold

Opening Inventory                   $000

Add Variable Cost of Goods Manufactured ( 3500 *(51+28+5=84))=

                                              $ 294000

Fixed Manufacturing Costs = $ 70,000

Cost of Goods Available For Sale = $ 364,000

Less Ending Inventory (450*84)= $ 37800

Cost of Goods Sold 326200

Gross Margin 125,200

Less

Variable selling and administrative expense $ 7* 3050=  21350

Fixed selling and administrative expense $ 27,450

Net Operating Income           76,400

The total gross margin for the month under the absorption costing approach is: $ 125200

In absorption costing the fixed manufacturing costs are included in the product cost whereas in the variable costing the fixed manufacturing costs are treated as period costs.

We have added the fixed manufacturing costs to the COGS and separated the selling and administrative expense which are both fixed and variable.