Locklear, Inc. reports the following information for the year ended December 31: $$\begin{array} { | l | r | l | }
\hline \text { Units sold } & 620 & \text { units } \
\hline \text { Sales price } & \$ 130 & \text { per unit } \
\hline \text { Direct materials } & \$ 28 & \text { per unit } \
\hline \text { Direct labor } & \$ 8 & \text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 13 & \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 12 & \text { per unit } \
\hline \text { Variable selling and administrative costs } & \$ 6 & \text { per unit } \
\hline \text { Fixed selling and administrative costs } & \$ 12,600 & \text { per year } \
\hline
\end{array}$$ The operating income calculated using variable costing and absorption costing amounted to $10,000 and $12,700, respectively. There were no beginning inventories. Determine the total fixed manufacturing overhead that will be expensed under absorption costing for the year.
A) $10,140
B) $7440
C) $24,800
D) $30,380

Question

Locklear, Inc. reports the following information for the year ended December 31: $$\begin{array} { | l | r | l | } 
\hline \text { Units sold } & 620 & \text { units } \
\hline \text { Sales price } & \$ 130 & \text { per unit } \
\hline \text { Direct materials } & \$ 28 & \text { per unit } \
\hline \text { Direct labor } & \$ 8 & \text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 13 & \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 12 & \text { per unit } \
\hline \text { Variable selling and administrative costs } & \$ 6 & \text { per unit } \
\hline \text { Fixed selling and administrative costs } & \$ 12,600 & \text { per year } \
\hline
\end{array}$$ The operating income calculated using variable costing and absorption costing amounted to $10,000 and $12,700, respectively. There were no beginning inventories. Determine the total fixed manufacturing overhead that will be expensed under absorption costing for the year.
A) $10,140
B) $7440
C) $24,800
D) $30,380

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead is included in the cost of inventory and expensed when the inventory is sold. The difference between the operating incomes calculated using absorption costing and variable costing is due to the amount of fixed manufacturing overhead that is included in inventory under absorption costing. 
Therefore, to determine the total fixed manufacturing overhead that will be expensed under absorption costing for the year, we need to subtract the operating income calculated using variable costing from the operating income calculated using absorption costing. 
$12,700 - $10,000 = $2,700 
This represents the amount of fixed manufacturing overhead that is included in inventory under absorption costing. Since there were no beginning inventories, this amount represents the total fixed manufacturing overhead that will be expensed under absorption costing for the year.

Locklear, Inc The Operating Income Calculated Using Variable Costing and Absorption Costing