A company that produces a single product had a net operating income of $75,000 using variable costing and a net operating income of $95,000 using absorption costing. Total fixed manufacturing overhead was $50,000 and production was 10,000 units both this year and last year. Last year was the first year of operations. Between the beginning and the end of the year, the inventory level:
A)decreased by 20,000 units
B)increased by 20,000 units
C)decreased by 4,000 units
D)increased by 4,000 units

Question

Quizplus · Accepted Answer

The difference in net operating income between absorption and variable costing is due to the fixed manufacturing overhead deferred in inventory. The $20,000 difference ($95,000 - $75,000) represents the fixed overhead cost of the 4,000 units added to inventory ($20,000 / $50,000 per 10,000 units = 4,000 units).

A Company That Produces a Single Product Had a Net