Kern Corporation produces a single product. Selected information concerning the operations of the company follow: Assume that direct labor is a variable cost.
Which costing method, absorption or variable costing, would show a higher operating income for the year and by what amount?
A) Absorption costing net operating income would be higher than variable costing net operating income by $2,500.
B) Variable costing net operating income would be higher than absorption costing net operating income by $2,500.
C) Absorption costing net operating income would be higher than variable costing net operating income by $5,500.
D) Variable costing net operating income would be higher than absorption costing net operating income by $5,500.

Question

Kern Corporation produces a single product. Selected information concerning the operations of the company follow:   Assume that direct labor is a variable cost.
Which costing method, absorption or variable costing, would show a higher operating income for the year and by what amount?
A) Absorption costing net operating income would be higher than variable costing net operating income by $2,500. 
B) Variable costing net operating income would be higher than absorption costing net operating income by $2,500. 
C) Absorption costing net operating income would be higher than variable costing net operating income by $5,500. 
D) Variable costing net operating income would be higher than absorption costing net operating income by $5,500.

Quizplus · Accepted Answer

Fixed manufacturing overhead per unit = $25,000 ÷ 10,000 units = $2.50 per unit
Units in ending inventory = Units in beginning inventory + Units produced - Units sold
= 0 units + 10,000 units - 9,000 units = 1,000 units
Manufacturing overhead deferred in (released from) inventory = Fixed manufacturing overhead in ending inventories - Fixed manufacturing overhead in beginning inventories
= ($2.50 per unit × 1,000 units) - $0 = $2,500
Therefore, absorption costing net operating income would be higher than variable costing net operating income by $2,500

Kern Corporation Produces a Single Product