A company that produces a single product had a net operating income of $82,000 using variable costing and a net operating income of $108,790 using absorption costing. Total fixed manufacturing overhead was $54,570 and production was 10,700 units. This year was the first year of operations. Between the beginning and the end of the year, the inventory level:
A) decreased by 26,790 units
B) increased by 26,790 units
C) decreased by 5,253 units
D) increased by 5,253 units

Question

Quizplus · Accepted Answer

The difference between net operating income under absorption costing and variable costing is due to the fixed manufacturing overhead costs included in the inventory under absorption costing. Since absorption costing net income is higher, it indicates that some of the fixed manufacturing overhead was capitalized into inventory, not expensed. The difference in net operating income ($108,790 - $82,000 = $26,790) is the amount of fixed manufacturing overhead costs capitalized into inventory. To find the change in inventory units, divide the difference in net operating income by the fixed manufacturing overhead per unit ($54,570 / 10,700 units = $5.10 per unit). Therefore, the change in inventory is $26,790 / $5.10 per unit = 5,253 units, indicating an increase in inventory.

A Company That Produces a Single Product Had a Net