Question

You have been asked to explain the difference between NOI for absorption costing and variable costing for Duncan Inc. You have the following information regarding the performance for the year:

	Absorption			Variable
Sales	$       1,260,000		Sales	1,260,000
Cost of goods sold	810,000		Variable cost of goods sold	720,000
Gross margin	450,000		Variable selling and administrative expenses	120,000
Selling and administrative expenses	195,000		Contribution margin	420,000
NOI	$          255,000		Fixed manufacturing overhead	120,000
			Fixed selling and administrative expenses	75,000
			NOI	225,000

You also know that 40,000 units were produced during the year and 30,000 units were sold. The difference between these two income statement methods is due to:

10,000 units taken from ending inventory times the total product costs per unit

10,000 units added to ending inventory times the total variable costs per unit

10,000 units added to ending inventory times the variable product costs per unit

10,000 units taken from ending inventory times the total variable costs per unit

10,000 units taken from ending inventory times the variable product costs per unit

10,000 units added to ending inventory times the fixed manufacturing overhead per unit

Answer 1

Duncan Inc.	Amount $
Fixed manufacturing overhead	120,000.00
Units produced	40,000.00
Fixed manufacturing overhead per unit	3.00
Units produced	40,000.00
Units sold	30,000.00
Units in ending inventory	10,000.00
Fixed manufacturing overhead in ending inventory	30,000.00
Final Answer	Amount $
NOI for absorption costing	255,000.00
Less: NOI for variable costing	225,000.00
Difference	30,000.00
So the difference is due to Fixed manufacturing overhead in ending inventory.
So correct answer is last option-
10,000 units added to ending inventory times the fixed manufacturing overhead per unit.