Asked by Abigail Small on Jun 29, 2024
Verified
Jeter Corporation had net income of $212,000 based on variable costing.Beginning and ending inventories were 6,000 units and 10,000 units,respectively.Assume the fixed overhead per unit was $4 for both the beginning and ending inventory.What is net income under absorption costing?
A) $252,000
B) $228,000
C) $244,000
D) $276,000
E) $212,000
Absorption Costing
A method in accounting where all costs of manufacturing are absorbed by the units produced.
Variable Costing
A costing method that includes only variable production costs (direct labor, materials, and overhead) in product costs, excluding fixed costs.
Fixed Overhead
Denotes the regular, recurring costs associated with running a business that do not fluctuate with production volume, such as rent, salaries, and utilities.
- Calculate net income using both variable costing and absorption costing methods.
- Analyze the impact of inventory levels on net income under both costing methods.
Verified Answer
BW
Brikarri WilliamsJul 06, 2024
Final Answer :
B
Explanation :
Under absorption costing, fixed manufacturing overhead is allocated to each unit of production. The difference in net income between variable costing and absorption costing is due to the change in inventory levels and the fixed overhead per unit included in the inventory. The increase in inventory is 4,000 units (10,000 ending - 6,000 beginning), and at $4 fixed overhead per unit, this results in an additional $16,000 (4,000 units * $4/unit) of fixed overhead included in the ending inventory under absorption costing. Therefore, the net income under absorption costing would be $212,000 (variable costing net income) + $16,000 = $228,000.
Learning Objectives
- Calculate net income using both variable costing and absorption costing methods.
- Analyze the impact of inventory levels on net income under both costing methods.