Question

H3 Co. is a farming corporation that grows and sells sugar beets. The company is publicly traded on the stock market: however, management prefers to use variable costing for decision purposes. The company's books are adjusted to arrive at Absorption Income for financial reporting purposes. The company reported the following financial information for the past month:

Variable Net Income:	$2,000,000
Sales:	5,000 truckloads of sugar beets
Fixed manufacturing costs rate per truckload:	$500
Variable SGA costs per truckload:	$100
Fixed SGA costs (overall):	$200,000

The company tracks harvested crops that have not yet been shipped out as "in-process.” This inventory of sugar beets increased from the equivalent of 50 full truckloads at the beginning of the month to 70 full truckloads at the end of the month.

What was Absorption Net Income?

Select one:

a. $1,988,000

b. $2,012,000

c. $1,990,000

d. $2,020,000

e. None of the above

Answer 1

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H3 Co.
Workings for Reconciliation	Amount $	Note
Fixed manufacturing cost allocation rate	500.00	C
Ending Inventory	70.00	N
Cost of Fixed manufacturing overhead in ending Inventory	35,000.00	O=C*N
Opening Inventory	50.00	P
Cost of Fixed manufacturing overhead in Opening Inventory	25,000.00	Q=C*P
Absorption Net Income	Amount $
Variable Net Income	2,000,000.00
Add: Deferred cost of Fixed manufacturing overhead in ending Inventory	35,000.00	See O
Less: Deferred cost of Fixed manufacturing overhead in Opening Inventory	(25,000.00)	See Q
Absorption Net Income	2,010,000.00
So answer is option e. None of the above.