Krepps Corporation produces a single product. Last year, Krepps manufactured 20,000 units and sold 15,000 units. Production costs for the year were as follows: Sales totaled $825,000 for the year, variable selling and administrative expenses totaled $108,000, and fixed selling and administrative expenses totaled $165,000. 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:
A) $101,250 lower than under absorption costing.
B) $60,000 lower than under absorption costing.
C) $101,250 higher than under absorption costing.
D) $60,000 higher than under absorption costing.

Question

Krepps Corporation produces a single product. Last year, Krepps manufactured 20,000 units and sold 15,000 units. Production costs for the year were as follows:  Sales totaled $825,000 for the year, variable selling and administrative expenses totaled $108,000, and fixed selling and administrative expenses totaled $165,000. 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:
A) $101,250 lower than under absorption costing. 
B) $60,000 lower than under absorption costing. 
C) $101,250 higher than under absorption costing. 
D) $60,000 higher than under absorption costing.

Quizplus · Accepted Answer

Units in ending inventory = Units in beginning inventory + Units produced - Units sold
= 0 units + 20,000 units - 15,000 units = 5,000 units
Fixed manufacturing overhead per unit = Fixed manufacturing overhead ÷ Units produced
= $240,000 ÷ 20,000 units = $12.00 per unit
Manufacturing overhead deferred in (released from) inventory = Fixed manufacturing overhead in ending inventory - Fixed manufacturing overhead in beginning inventory = ($12.00 per unit × 5,000 units) - $0 = $60,000
Therefore, variable costing net operating income will be $60,000 lower than absorption costing net operating income.

Krepps Corporation Produces a Single Product