(Appendix 6A) Letcher Corporation manufactures and sells one product. The following information pertains to the company's first year of operations:
The company does not have any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, the company produced 56,000 units and sold 54,000 units. The company's only product is sold for $227 per unit.
-The company is considering using either super-variable costing or an absorption costing system that assigns $11 of direct labor cost and $62 of fixed manufacturing overhead to each unit that is produced.Which of the following statements is true regarding the net operating income in the first year?
A) Super-variable costing net operating income exceeds absorption costing net operating income by $146,000.
B) Absorption costing net operating income exceeds super-variable costing net operating income by $124,000.
C) Super-variable costing net operating income exceeds absorption costing net operating income by $124,000.
D) Absorption costing net operating income exceeds super-variable costing net operating income by $146,000.

Question

(Appendix 6A) Letcher Corporation manufactures and sells one product. The following information pertains to the company's first year of operations:
  The company does not have any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, the company produced 56,000 units and sold 54,000 units. The company's only product is sold for $227 per unit.
-The company is considering using either super-variable costing or an absorption costing system that assigns $11 of direct labor cost and $62 of fixed manufacturing overhead to each unit that is produced.Which of the following statements is true regarding the net operating income in the first year?
A) Super-variable costing net operating income exceeds absorption costing net operating income by $146,000. 
B) Absorption costing net operating income exceeds super-variable costing net operating income by $124,000. 
C) Super-variable costing net operating income exceeds absorption costing net operating income by $124,000. 
D) Absorption costing net operating income exceeds super-variable costing net operating income by $146,000.

Quizplus · Accepted Answer

Ending inventory = Beginning inventory + Units produced - Units sold = 0 + 56,000 units - 54,000 units = 2,000 units
Direct labor and fixed manufacturing overhead cost deferred in (released from) inventory = Direct labor and fixed manufacturing overhead cost in ending inventory - Direct labor and fixed manufacturing overhead cost in beginning inventory = [($11 per unit + $62 per unit) × 2,000 units] - $0 = $146,000
Because inventory increased, direct labor and fixed manufacturing overhead cost is deferred in inventory under the absorption costing system. This increases the net operating income under absorption costing by $146,000 relative to the net operating income under super-variable costing.

(Appendix 6A) Letcher Corporation Manufactures and Sells One Product