The following information pertains to Nute Corporation:
$$\begin{array} { l r }
\text { Beginning inventory } & 1,000 \text { units } \
\text { Ending inventory } & 6,000 \text { units } \
\text { Direct labour per unit } & \$ 40 \
\text { Direct materials per unit } & 20 \
\text { Variable overhead per unit } & 10 \
\text { Fixed overhead per unit } & 30 \
\text { Variable selling and administrative costs per unit } & 6 \
\text { Fixed selling and administrative costs per unit } & 14
\end{array}$$
-Refer to the Figure.What is the relationship between absorption costing net income and variable costing net income?
A)Absorption costing net income is $150,000 less.
B)Absorption costing net income is $150,000 greater.
C)Absorption costing net income is $240,000 less.
D)Absorption costing net income is $240,000 greater.

Question

The following information pertains to Nute Corporation:
 $$\begin{array} { l r } 
\text { Beginning inventory } & 1,000 \text { units } \
\text { Ending inventory } & 6,000 \text { units } \
\text { Direct labour per unit } & \$ 40 \
\text { Direct materials per unit } & 20 \
\text { Variable overhead per unit } & 10 \
\text { Fixed overhead per unit } & 30 \
\text { Variable selling and administrative costs per unit } & 6 \
\text { Fixed selling and administrative costs per unit } & 14
\end{array}$$
-Refer to the Figure.What is the relationship between absorption costing net income and variable costing net income?
A)Absorption costing net income is $150,000 less.
B)Absorption costing net income is $150,000 greater.
C)Absorption costing net income is $240,000 less.
D)Absorption costing net income is $240,000 greater.

Quizplus · Accepted Answer

Under absorption costing, both variable and fixed manufacturing costs are included in product costs, whereas under variable costing, only variable manufacturing costs are included in product costs. The difference in net income between the two methods is due to the treatment of fixed manufacturing overhead. With an increase in inventory, absorption costing will allocate some of the fixed overhead to the increased inventory, thus reducing the expense recognized during the period compared to variable costing. The increase in ending inventory (6,000 units) compared to beginning inventory (1,000 units) by 5,000 units, and the fixed overhead per unit being $30, results in a $150,000 (5,000 units * $30/unit) difference in net income, with absorption costing showing a higher net income by this amount because less fixed overhead is expensed in the current period.

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