(Appendix 5A)Prehn Corporation manufactures and sells one product.The following information pertains to the company's first year of operations: The company does not have any variable manufacturing overhead costs or variable selling and administrative costs.During its first year of operations, the company produced 36, 000 units and sold 30, 000 units.The company's only product is sold for $251 per unit. The company is considering using either super-variable costing or a variable costing system that assigns $28 of direct labor cost to each unit that is produced.Which of the following statements is true regarding the net operating income in the first year?
A)Super-variable costing net operating income exceeds variable costing net operating income by $168, 000.
B)Super-variable costing net operating income exceeds variable costing net operating income by $420, 000.
C)Variable costing net operating income exceeds super-variable costing net operating income by $420, 000.
D)Variable costing net operating income exceeds super-variable costing net operating income by $168, 000.

Question

(Appendix 5A)Prehn Corporation manufactures and sells one product.The following information pertains to the company's first year of operations:  The company does not have any variable manufacturing overhead costs or variable selling and administrative costs.During its first year of operations, the company produced 36, 000 units and sold 30, 000 units.The company's only product is sold for $251 per unit. The company is considering using either super-variable costing or a variable costing system that assigns $28 of direct labor cost to each unit that is produced.Which of the following statements is true regarding the net operating income in the first year?
A)Super-variable costing net operating income exceeds variable costing net operating income by $168, 000. 
B)Super-variable costing net operating income exceeds variable costing net operating income by $420, 000. 
C)Variable costing net operating income exceeds super-variable costing net operating income by $420, 000. 
D)Variable costing net operating income exceeds super-variable costing net operating income by $168, 000.

Quizplus · Accepted Answer

Ending inventory = Beginning inventory + Units produced - Units sold = 0 + 36, 000 units - 30, 000 units = 6, 000 units
Direct labor cost deferred in (released from)inventory = Direct labor cost in ending inventory - Direct labor cost in beginning inventory = ($28 per unit × 6, 000 units)- $0 = $168, 000
Because inventory increased, direct labor cost is deferred in inventory under the variable costing system described above.This increases the net operating income under variable costing by $168, 000 relative to the net operating income under super-variable costing.

(Appendix 5A)Prehn Corporation Manufactures and Sells One Product