Asked by Adison Evans on May 02, 2024
Verified
Kluber,Inc.had net income of $900,000 based on variable costing.Beginning and ending inventories were 55,000 units and 52,000 units,respectively.Assume the fixed overhead per unit was $1.25 for both the beginning and ending inventory.What is net income under absorption costing?
A) $833,125
B) $903,750
C) $966,875
D) $896,250
E) $900,000
Absorption Costing
A method of costing that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of a product.
Variable Costing
An accounting method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product costs, excluding fixed overhead from inventory valuation.
Fixed Overhead
Recurring operating expenses that remain relatively constant regardless of the level of production or business activity.
- Ascertain net earnings by employing both variable costing and absorption costing approaches.
- Examine how inventory levels affect net income using different costing approaches.
Verified Answer
ZK
Zybrea KnightMay 04, 2024
Final Answer :
D
Explanation :
Under absorption costing, fixed overhead costs are included in the product cost and become a part of inventory until the units are sold. To calculate net income under absorption costing, we need to add the fixed overhead cost per unit to the variable cost per unit and multiply that by the number of units sold.
Variable cost per unit = total variable costs ÷ number of units produced
= $900,000 ÷ (55,000 units - 52,000 units)
= $300 per unit
Fixed overhead cost per unit = fixed overhead costs ÷ number of units produced
= ($1.25 per unit x 55,000 units) + ($1.25 per unit x 52,000 units)
= $137,500
Total cost per unit under absorption costing = variable cost per unit + fixed overhead cost per unit
= $300 + $1.25
= $301.25
Number of units sold = units produced - ending inventory
= 55,000 units - 52,000 units
= 3,000 units
Net income under absorption costing = (total cost per unit x number of units sold) - fixed overhead costs in ending inventory
= ($301.25 x 3,000 units) - ($1.25 per unit x 52,000 units)
= $903,750
Therefore, the correct answer is D.
Variable cost per unit = total variable costs ÷ number of units produced
= $900,000 ÷ (55,000 units - 52,000 units)
= $300 per unit
Fixed overhead cost per unit = fixed overhead costs ÷ number of units produced
= ($1.25 per unit x 55,000 units) + ($1.25 per unit x 52,000 units)
= $137,500
Total cost per unit under absorption costing = variable cost per unit + fixed overhead cost per unit
= $300 + $1.25
= $301.25
Number of units sold = units produced - ending inventory
= 55,000 units - 52,000 units
= 3,000 units
Net income under absorption costing = (total cost per unit x number of units sold) - fixed overhead costs in ending inventory
= ($301.25 x 3,000 units) - ($1.25 per unit x 52,000 units)
= $903,750
Therefore, the correct answer is D.
Learning Objectives
- Ascertain net earnings by employing both variable costing and absorption costing approaches.
- Examine how inventory levels affect net income using different costing approaches.