At the end of last year,Lee Company had 30,000 units in its ending inventory.Every year,Lee Company's variable production costs are $10 per unit,and its fixed manufacturing overhead costs are $5 per unit.The company's operating income for the year was $12,000 higher under variable costing than under absorption costing.Given these facts,what must have been the number of units of product in inventory at the beginning of the year?
A) 27,600 units.
B) 28,800 units.
C) 32,400 units.
D) 42,000 units.

Question

Quizplus · Accepted Answer

To find the number of units in inventory at the beginning of the year, we need to use the operating income difference between variable costing and absorption costing. The difference is $12,000.

Under variable costing, only the variable manufacturing costs are included in inventory (in this case, $10 per unit). Therefore, the $12,000 operating income difference must be due to a difference in the fixed manufacturing overhead costs recognized under the two methods.

Since fixed manufacturing overhead costs are not included in variable costing, the $12,000 difference must be due to the fixed manufacturing overhead costs associated with units that were in inventory at the beginning of the year and sold during the year under absorption costing.

Using the formula:

Fixed manufacturing overhead cost per unit = (Operating income difference) / (Number of units sold)

Fixed manufacturing overhead cost per unit = $12,000 / (30,000 - Beginning inventory)

Fixed manufacturing overhead cost per unit = $5 per unit

Therefore, the number of units in inventory at the beginning of the year is:

Beginning inventory = (Fixed manufacturing overhead cost per unit) x (Beginning inventory)

Beginning inventory = $5 per unit x Beginning inventory

Beginning inventory = $162,000 / $5 per unit

Beginning inventory = 32,400 units

Thus, the best choice is C) 32,400 units.

At the End of Last Year,Lee Company Had 30,000 Units