During its first year of operations,the McCormick Company incurred the following manufacturing costs: Direct materials,$5 per unit,Direct labor,$3 per unit,Variable overhead,$4 per unit,and Fixed overhead,$250,000.The company produced 25,000 units,and sold 20,000 units,leaving 5,000 units in inventory at year-end.Income calculated under variable costing is determined to be $315,000.How much income is reported under absorption costing?

A) $315,000
B) $265,000
C) $565,000
D) $365,000
E) $290,000

Question

Chris Grecco · Accepted Answer

Final Answer : D, Explanation :  Under absorption costing, both variable and fixed manufacturing costs are included in the cost of inventory. The difference in income between variable costing and absorption costing is due to the treatment of fixed overhead costs. Under variable costing, all fixed overhead costs are expensed in the period they are incurred. Under absorption costing, fixed overhead costs are allocated to the units produced, so part of the fixed overhead costs are included in the ending inventory if not all units are sold.To calculate the income under absorption costing, we need to adjust the variable costing income by the fixed overhead costs allocated to the ending inventory.Fixed overhead cost per unit = Total fixed overhead / Total units produced = $250,000 / 25,000 units = $10 per unitEnding inventory units = 5,000 unitsFixed overhead costs allocated to ending inventory = $10 per unit * 5,000 units = $50,000Since under absorption costing, these $50,000 of fixed overhead costs are included in the ending inventory and not expensed, the income will be higher by this amount compared to variable costing.Income under absorption costing = Income under variable costing + Fixed overhead costs allocated to ending inventory = $315,000 + $50,000 = $365,000

Definitions

Learning Objectives

Learning Objectives

Related questions