Carr Company produces a single product. During the past year, Carr manufactured

Question

Carr Company produces a single product. During the past year, Carr manufactured 25,000 units and sold 20,000 units. Production costs for the year were as follows: Sales totaled $850,000, variable selling expenses totaled $110,000, and fixed selling and administrative expenses totaled $170,000. There were no units in beginning inventory. Assume that direct labor is a variable cost. The net operating income for the year under variable costing would be: A) $28,000 lower than under absorption costing B) $28,000 higher than under absorption costing C) $50,000 lower than under absorption costing D) $50,000 higher than under absorption costing

Explanation / Answer

rate me ist Solution: Unit selling price ($840,000 ÷ 12,000) $70 Less direct materials ($150,000 ÷ 15,000) $10 Less direct labor ($180,000 ÷ 15,000) 12 Less variable manufacturing overhead ($135,000 ÷ 15,000) 9 Less variable selling and administrative ($60,000 ÷ 12,000) 5 36 Contribution margin $34 6. Under absorption costing, the carrying value on the balance sheet of the ending inventory for the year would be: A) $135,000 B) $93,000 C) $105,000 D) $0 Solution: Unit fixed manufacturing overhead = $210,000 ÷ 15,000 = $14 Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $10 + $12 + $9 + $14 = $45 Carrying value = Unit product cost × Ending inventory in units = $45 × (15,000 - 12,000) = $45 × 3,000 = $135,000 7. Under variable costing, the company's net operating income for the year would be: A) $42,000 higher than under absorption costing B) $30,000 higher than under absorption costing C) $30,000 lower than under absorption costing D) $42,000 lower than under absorption costing Solution: Unit fixed manufacturing overhead × Change in inventory in units = $14 × (15,000 - 12,000) = $14 × 3,000 = $42,000 Since the units produced are greater than the units sold (inventory increased), net income under absorption costing will be higher than net income under variable costing.

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