The following information pertains to Stark Corporation:
$\begin{array}{lr}
\text { Beginning inventory } & 0 \text { units } \
\text { Ending inventory } & 5,000 \text { units } \
\text { Direct labour per unit } & \$ 20 \
\text { Direct materials per unit } & 16 \
\text { Variable overhead per unit } & 4 \
\text { Fixed overhead per unit } & 10 \
\text { Variable selling costs per unit } & 12 \
\text { Fixed selling costs per unit } & 16
\end{array}$
-Refer to the figure.How would absorption costing net income compare to the variable costing net income?
A)Absorption costing net income would be $50,000 greater than the variable costing net income.
B)Absorption costing net income would be $50,000 less than the variable costing net income.
C)Absorption costing net income would be $70,000 greater than the variable costing net income.
D)Absorption costing net income would be $70,000 less than the variable costing net income.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed overhead costs are allocated to the cost of each unit produced. Since there is an ending inventory of 5,000 units, these units would absorb the fixed overhead cost, which is $10 per unit. Therefore, the fixed overhead cost deferred in inventory under absorption costing would be 5,000 units * $10/unit = $50,000. This means that the absorption costing net income would be $50,000 greater than the variable costing net income, because under variable costing, the entire fixed overhead cost is expensed in the period it is incurred, not deferred in inventory.

The Following Information Pertains to Stark Corporation -Refer to the Figure