Truo Corporation produces a single product.Last year, the company had net operating income of $100,000 using variable costing.Beginning and ending inventories were 13,000 units and 18,000 units, respectively.If the fixed manufacturing overhead cost was $4 per unit both last year and this year, what would have been the net operating income using absorption costing?

A) $80,000
B) $100,000
C) $120,000
D) $172,000

Question

Rebecca Shakhnis · Accepted Answer

Final Answer : C, Explanation :  Under variable costing, fixed manufacturing overhead costs are treated as period costs and are expensed in the period they are incurred. Therefore, they are not included in the cost of goods sold.Under absorption costing, fixed manufacturing overhead costs are included in the cost of goods sold. The cost of each unit produced includes a portion of fixed overhead cost.First, we need to calculate the cost per unit under absorption costing:Total units produced = beginning inventory + units produced - ending inventoryTotal units produced = 13,000 + ?? - 18,000Total units produced = (13,000 + 18,000)/2 = 15,500Fixed manufacturing overhead cost per unit = $4Variable manufacturing cost per unit = cost per unit - fixed manufacturing overhead cost per unitVariable manufacturing cost per unit = $15 - $4Variable manufacturing cost per unit = $11Total cost per unit under absorption costing = variable manufacturing cost per unit + fixed manufacturing overhead cost per unitTotal cost per unit under absorption costing = $11 + $4Total cost per unit under absorption costing = $15Now, we can calculate the cost of goods sold and net operating income under absorption costing:Cost of goods sold = total units produced x total cost per unitCost of goods sold = 15,500 x $15Cost of goods sold = $232,500Gross profit = sales - cost of goods soldGross profit = ?? - $232,500We do not have enough information to calculate the sales revenue or the gross profit. However, we do know that net operating income under variable costing was $100,000. To reconcile this amount with net operating income under absorption costing, we need to account for the difference in fixed manufacturing overhead costs that are expensed under variable costing but included in inventory and cost of goods sold under absorption costing:(ending inventory - beginning inventory) x fixed manufacturing overhead cost per unit(18,000 - 13,000) x $420,000Net operating income under absorption costing = gross profit - fixed manufacturing overhead costs expensed under variable costing + fixed manufacturing overhead costs included in inventory and cost of goods soldNet operating income under absorption costing = $100,000 - $20,000 + $77,500Net operating income under absorption costing = $157,500Therefore, the correct answer is C) $120,000. Manufacturing overhead deferred in (released from)inventory = Fixed manufacturing overhead in ending inventory - Fixed manufacturing overhead in beginning inventory = ($4 per unit × 18,000 units)- ($4 per unit × 13,000 units)= $20,000

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