Moore Company produces a single product. During last year, Moore\'s variable pro
ID: 2486069 • Letter: M
Question
Moore Company produces a single product. During last year, Moore's variable production costs totaled $10,000 and its fixed manufacturing overhead costs totaled $6,800. The company produced 5,000 units during the year and sold 4,600 units. There were no units in the beginning inventory. Which of the following statements is true?
The net operating income under absorption costing for the year will be $544 lower than net operating income under variable costing.
The net operating income under absorption costing for the year will be $800 lower than net operating income under variable costing.
The net operating income under absorption costing for the year will be $800 higher than net operating income under variable costing.
The net operating income under absorption costing for the year will be $544 higher than net operating income under variable costing.
Explanation / Answer
Income under absorption costing
Under absorption costing cost of goods sold will be based on unit product cost of variable and fixed manufacturing cost
Hence unit product cost = (10,000 +6800)/5,000
=$3.36
On the other hand under variable costing only variable cost is used for calculating unit product cost
=10,000/5,000
=$2 per unit
Ending inventory = 5,000 – 4,600
= 400 units
hence difference in cost will be 400(3.36-2.00)
= $544
Under absorption costing the net income will be greater since the fixed cost in closing inventory will be deferred
The net operating income under absorption costing for the year will be $544 higher than net operating income under variable costing.
Under absorption costing cost of goods sold will be based on unit product cost of variable and fixed manufacturing cost
Hence unit product cost = (10,000 +6800)/5,000
=$3.36
On the other hand under variable costing only variable cost is used for calculating unit product cost
=10,000/5,000
=$2 per unit
Ending inventory = 5,000 – 4,600
= 400 units
hence difference in cost will be 400(3.36-2.00)
= $544
Under absorption costing the net income will be greater since the fixed cost in closing inventory will be deferred
The net operating income under absorption costing for the year will be $544 higher than net operating income under variable costing.
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