Question

Andy’s Water Pets Inc. makes 100-gallon plexiglass aquariums. They reported the following financial information for last year: Direct labor: 6,000 hours @ $20/hr Production manager salary: $50,000 Factory rent: $24,000 Equipment maintenance: $10,000 (considered a variable expense) Equipment depreciation: $10,000 Production for the year: 12,000 units Total Revenue: $1,000,000 Total aquariums sold during the period: 15,000 units Operating Income under variable costing (after non-production expenses): $204,000 Assume that the fixed costs were the same on a per-unit basis during the prior period. What would Operating Income be under absorption costing? (Round per-unit costs to the nearest cent.) Select one: a. $180,510 b. $227,490 c. $183,000 d. $225,000 e. None of the above

Answer 1

Absorption costing comsiders fixed OH as product cost.

It is carried forward to next period in inventory

Variable costing consider Fixed OH as period cost. It is recorded as an expense entirely in period in which it incurs

Here fixed OH that remains constant at all levels of production are:

Production manager salary =$50,000

Factory rent = $24,000

Equipment maintenance == $10,000

=$84,000

as the units produced < units sold there will be beginning inventory and fixed OH of beginning inventory will be recorded as an expense as per absorption costing.

so profit as per absorption costing will be lower than variable costing due to higher expense.

FIXED OH per unit = $84,000/12,000 units =$7

Fixed OH carried in beginning inventory [15,000 sold-12,000units produced] =3,000 units beginning inventory sold

=3,000*$7

=$21,000

Profit as per variable costing	$204,000
Less: Fixed OH i n beginning inventory	($21,000)
Profit as per absorption costing	$183,000

Answer C