Helmers Corporation manufactures a single product. Variable costing net operating income last year was $86,000 and this year was $103,000. Last year, $32,000 in fixed manufacturing overhead costs were released from inventory under absorption costing. This year, $12,000 in fixed manufacturing overhead costs were deferred in inventory under absorption costing.What was the absorption costing net operating income last year?
A) $106,000
B) $86,000
C) $54,000
D) $118,000

Question

Quizplus · Accepted Answer

To calculate absorption costing net operating income, we need to add the fixed manufacturing overhead costs released from inventory to variable costing net operating income. Similarly, we subtract the fixed manufacturing overhead costs deferred in inventory from variable costing net operating income.

Absorption costing net operating income last year = Variable costing net operating income last year + Fixed manufacturing overhead costs released from inventory under absorption costing
Absorption costing net operating income last year = $86,000 + $32,000
Absorption costing net operating income last year = $118,000

Absorption costing net operating income this year = Variable costing net operating income this year - Fixed manufacturing overhead costs deferred in inventory under absorption costing 
Absorption costing net operating income this year = $103,000 - $12,000
Absorption costing net operating income this year = $91,000

So, the change in net operating income from last year to this year under absorption costing is $91,000 - $118,000 = -$27,000

We know that the change in net operating income from variable costing to absorption costing is due to the changes in inventory levels. Here, the inventory levels have changed in such a way that $32,000 in fixed manufacturing overhead costs were released in the year with the higher net operating income, and $12,000 in fixed manufacturing overhead costs were deferred in the year with the lower net operating income. This means that the inventory levels were higher in the year with the higher net operating income, causing the release of more fixed overhead costs.

To determine the absorption costing net operating income last year, we need to adjust the variable costing net operating income by the change in inventory-levels. If the inventory levels were the same in both years, the absorption costing net operating income would have been the same as the variable costing net operating income.

Adjustment to variable costing net operating income = Change in fixed manufacturing overhead costs in inventory
Adjustment to variable costing net operating income = $32,000 - $12,000
Adjustment to variable costing net operating income = $20,000

Absorption costing net operating income last year = Variable costing net operating income last year + Adjustment to variable costing net operating income
Absorption costing net operating income last year = $86,000 + $20,000
Absorption costing net operating income last year = $106,000

Thus, the absorption costing net operating income last year was $106,000 (Choice A is incorrect), and the correct answer is C.

Helmers Corporation Manufactures a Single Product