5.7 Income statement – total output/sales
An illustration of an income statement for total output/sales using activity-based costing (ABC), let’s assume a manufacturing company that produces and sells multiple units of its product. We will calculate the income statement based on the total output/sales.
Assumptions:
- Total units sold: 1,000
- Revenue per unit: kshs1,000
Direct costs:
- Direct materials cost per unit: kshs300
- Direct labor cost per unit: kshs200
- Direct other costs (e.g., packaging, shipping) per unit: kshs50
Gross margin: Total revenue: 1,000 (units sold) × kshs1,000 (revenue per unit) = kshs1,000,000
Total direct costs: 1,000 (units sold) × (kshs300 + kshs200 + kshs50) = kshs550,000
Gross margin: Total revenue – Total direct costs = kshs1,000,000 – kshs550,000 = kshs450,000
Allocated overhead costs:
- Activity 1 (Machine setup) cost per unit: kshs20
- Activity 2 (Quality inspection) cost per unit: kshs15
- Activity 3 (Product design) cost per unit: kshs30
Total allocated overhead costs: 1,000 (units sold) × (kshs20 + kshs15 + kshs30) = kshs65,000
Operating income (or net income): Gross margin – Total allocated overhead costs = kshs450,000 – kshs65,000 = kshs385,000
In this illustration, the company sells a total of 1,000 units of its product, generating kshs1,000,000 in revenue (kshs1,000 per unit). The direct costs associated with producing and selling the 1,000 units amount to kshs550,000 (kshs550 per unit), resulting in a gross margin of kshs450,000.
The allocated overhead costs are determined by multiplying the activity costs per unit by the total number of units sold. In this case, the total allocated overhead costs amount to kshs65,000.
Finally, subtracting the total allocated overhead costs from the gross margin gives us an operating income (or net income) of kshs385,000.
