selling and administrative expenses

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:

TIS1

Let’s use the example from the absorption and variable costing post to create this income statement.

AB1

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).

AB2

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

TIS2

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

TIS3

Calculate gross profit by subtracting cost of goods sold from sales.

TIS4

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

TIS5

Last but not least, calculate the operating income by subtracting selling and administrative expenses from gross profit.

TIS6

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.

Share This:


Related pages


what is the purpose of adjusting entriesplantwide rate formulatally adjustment entriesjournal entry for return of capitalhow to calculate direct materials purchasedsalvage value depreciationmanufacturer wholesaler distributor retailerdouble decline depreciation formulaprincipal outstanding calculatorwhich of the following assets is the most liquidfifo cost formulabond amortization schedule straight line methodretire treasury stock journal entrysimple interest and maturity value calculatorafter each transaction the accounting equation must remain in balancesample income statementscontribution format income statement examplecurrent market price of bond calculatorcalculate gp percentageaccruals journal entryhow to find fixed cost formulajournal entries of depreciationjournal entry for uncollectible accountshow to calculate profit margin per unithow to calculate write offsinterest bearing note payablefederal withholding tax percentage 2014fifo calculation examplevariable costs are controllable and fixed costs are notwhat is the basic accounting equation explain with exampleemployers payroll tax calculatort accounts assets and liabilitieshow to calculate gross salary from net payschedule of goods manufacturedfinancial accounting equationinventory accountant salaryformula for present value of ordinary annuitystraight line method for calculating depreciationjob costing formataccounting for merchandising operations solutionsperiodic vs perpetual inventory systempayroll tax percentage calculatorallowance for doubtful receivablespresent value of annuity of $1warranty journal entriestake home pay calculator with overtimehow to calculate total variable costdiminishing balance method of depreciation formulaaccrued expense journalamortized bondcalculate sales price variancecalculating depreciation with salvage valuelifo costing methodlifo fifo weighted averagebi weekly tax calculatorformula to calculate fixed costbad debt provision double entryaccounts receivable contra accountpresent value interest factor calculatorcalculate weighted average gradeswhat is direct and indirect expenses in accountingwrite off of uncollectible accountsnet operating income formula managerial accountingprepare an adjusted trial balancecash flow statement retained earningscar loan accounting entryfind ending inventorydividend journal entriesvalue of bond calculatordirect labor hours formulacurrent portion of long term debt journal entry