Question

Krepps Corporation produces a single product. Last year, Krepps manufactured 29,010 units and sold 23,900 units. Production costs for the year were as follows:

Direct materials	$	214,674
Direct labor	$	121,842
Variable manufacturing overhead	$	243,684
Fixed manufacturing overhead	$	319,110

Sales totaled $1,159,150 for the year, variable selling and administrative expenses totaled $126,670, and fixed selling and administrative expenses totaled $205,971. There was no beginning inventory. Assume that direct labor is a variable cost.

Under variable costing, the company's net operating income for the year would be:

• $30,149 lower than under absorption costing.

• $30,149 higher than under absorption costing.

• $56,210 lower than under absorption costing.

• $56,210 higher than under absorption costing.

Answer 1

The correct answer is

$ 56210 lower than under absorption costing

Calculation

Since the production is more than sales, it means the ending inventory has increased in units as compared to beginning inventory, so in absorption costing fixed manufacturing overheads will become part of ending inventory, due to which the absorption costing income statement will have higher profit as compared to variable costing. So it means that the variable costing will have lower profit

Profit will be lower in variable costing by

= total manufacturing overheads / production * units in ending inventory

= 319110/29010*(29010-23900)

= 11*5110

= $ 56210

Thus the correct answer is

$ 56210 lower than under absorption costing