During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials, $5 per unit, Direct labor, $3 per unit, Variable overhead, $4 per unit, and Fixed overhead, $250,000. The company produced 25,000 units, and sold 20,000 units, leaving 5,000 units in inventory at year-end. Income calculated under variable costing is determined to be $315,000. How much income is reported under absorption costing?
A) $315,000
B) $265,000
C) $565,000
D) $365,000

Question

Quizplus · Accepted Answer

Under absorption costing, fixed overhead is allocated to each unit produced. Since 5,000 units remain in inventory, $50,000 ($250,000 fixed overhead / 25,000 units * 5,000 units) of fixed overhead is deferred in inventory. Therefore, absorption costing income is $315,000 + $50,000 = $365,000.

During Its First Year of Operations, the McCormick Company Incurred