The following information pertains to Shark Corporation:
$$\begin{array} { l r }
\text { Beginning inventory } & 0 \text { units } \
\text { Ending inventory } & 6,000 \text { units } \
\text { Direct labour per unit } & \$ 2022 \
\text { Direct materials per unit } & 1618 \
\text { Variable overhead per unit } & 48 \
\text { Fixed overhead per unit } & 1012 \
\text { Variable selling costs per unit } & 1214 \
\text { Fixed selling costs per unit } & 1618
\end{array}$$
-Refer to the Figure.What is the relationship between absorption-costing net income and variable-costing net income?
A)Absorption-costing net income is $72,000 less.
B)Absorption-costing net income is $70,000 less.
C)Absorption-costing net income is $72,000 greater.
D)Absorption-costing net income is $70,000 greater.

Question

The following information pertains to Shark Corporation:
 $$\begin{array} { l r } 
\text { Beginning inventory } & 0 \text { units } \
\text { Ending inventory } & 6,000 \text { units } \
\text { Direct labour per unit } & \$ 2022 \
\text { Direct materials per unit } & 1618 \
\text { Variable overhead per unit } & 48 \
\text { Fixed overhead per unit } & 1012 \
\text { Variable selling costs per unit } & 1214 \
\text { Fixed selling costs per unit } & 1618
\end{array}$$
-Refer to the Figure.What is the relationship between absorption-costing net income and variable-costing net income?
A)Absorption-costing net income is $72,000 less.
B)Absorption-costing net income is $70,000 less.
C)Absorption-costing net income is $72,000 greater.
D)Absorption-costing net income is $70,000 greater.

Quizplus · Accepted Answer

Absorption costing includes both variable and fixed manufacturing costs in the cost of goods sold, whereas variable costing includes only variable manufacturing costs. The difference in net income between the two methods is due to the treatment of fixed manufacturing overhead. With an ending inventory of 6,000 units and a fixed overhead per unit of $1,012, the difference in fixed overhead costs allocated to ending inventory under absorption costing would be 6,000 units * $1,012 = $6,072,000. However, without information on the number of units produced or sold, the specific net income difference cannot be accurately calculated from the provided data. The correct relationship (greater or less) depends on whether the ending inventory increased or decreased, but with the given information, it's not possible to calculate the exact dollar difference. The choice is based on understanding the conceptual difference between the costing methods, not the provided numerical data.

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