Badlands,Inc.reports the following information for the year ended December 31: $$\begin{array} { | l | r | }
\hline \text { Units sold } & { 590 \text { units } } \
\hline \text { Sales price } & \$ 130 \text { per unit } \
\hline \text { Direct materials } & \$ 28 \text { per unit } \
\hline \text { Direct labor } & \$ 9 \text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 15 \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 25 \text { per unit } \
\hline \text { Variable selling and administrative costs } & \$ 6 \text { per unit } \
\hline \text { Fixed selling and administrative costs } & \$ 12,400 \text { per year } \
\hline
\end{array}$$ The operating income calculated using variable costing and absorption costing amounted to $10,000 and $13,300,respectively.There were no beginning inventories.Determine the total number of units produced during the year.
A) 590 units
B) 722 units
C) 26 units
D) 132 units

Question

Badlands,Inc.reports the following information for the year ended December 31: $$\begin{array} { | l | r | } 
\hline \text { Units sold } &  { 590 \text { units } } \
\hline \text { Sales price } & \$ 130 \text { per unit } \
\hline \text { Direct materials } & \$ 28 \text { per unit } \
\hline \text { Direct labor } & \$ 9 \text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 15 \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 25 \text { per unit } \
\hline \text { Variable selling and administrative costs } & \$ 6 \text { per unit } \
\hline \text { Fixed selling and administrative costs } & \$ 12,400 \text { per year } \
\hline
\end{array}$$ The operating income calculated using variable costing and absorption costing amounted to $10,000 and $13,300,respectively.There were no beginning inventories.Determine the total number of units produced during the year.
A) 590 units
B) 722 units
C) 26 units
D) 132 units

Quizplus · Accepted Answer

The difference between operating income under absorption costing and variable costing is due to the treatment of fixed manufacturing overhead costs. Under absorption costing, all fixed manufacturing overhead costs are allocated to the units produced, which means that if not all units are sold, some of the fixed manufacturing overhead costs are deferred to future periods as part of inventory costs. Under variable costing, all fixed manufacturing overhead costs are expensed in the period they are incurred, regardless of the number of units sold or produced.Given that the operating income under absorption costing is $13,300 and under variable costing is $10,000, the difference of $3,300 represents the fixed manufacturing overhead costs deferred in inventory under absorption costing. Since the fixed manufacturing overhead cost per unit is $25, we can calculate the number of units produced but not sold (i.e., ending inventory) as follows:$$ \text{Difference in operating income} / \text{Fixed manufacturing overhead cost per unit} = \text{Units in ending inventory} $$$$ \$3,300 / \$25 = 132 \text{ units} $$Since there were no beginning inventories and the difference in income represents the fixed overhead costs allocated to the units produced but not sold, we can determine the total units produced by adding the units sold to the units in ending inventory:$$ \text{Units sold} + \text{Units in ending inventory} = \text{Total units produced} $$$$ 590 + 132 = 722 \text{ units} $$Therefore, the total number of units produced during the year is 722 units.

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