Moore Company produces a single product.During last year,Moore's variable production costs totaled $10,000 and its fixed manufacturing overhead costs totaled $6,800.The company produced 5,000 units during the year and sold 4,600 units.There were no units in the beginning inventory.Which of the following statements is true?
A)The net operating income under absorption costing for the year will be $800 higher than net operating income under variable costing.
B)The net operating income under absorption costing for the year will be $544 higher than net operating income under variable costing.
C)The net operating income under absorption costing for the year will be $544 lower than net operating income under variable costing.
D)The net operating income under absorption costing for the year will be $800 lower than net operating income under variable costing.

Question

Quizplus · Accepted Answer

Under variable costing, only variable manufacturing costs are included in product costs. Therefore, the cost of goods sold for the year would be $10,000 (variable manufacturing costs per unit of $2 multiplied by 4,600 units sold) and the contribution margin would be $8 per unit ($20 selling price per unit minus $12 variable manufacturing costs per unit). The total contribution margin would be $36,800 (4,600 units sold multiplied by $8 contribution margin per unit). Since fixed manufacturing overhead costs are not included in product costs under variable costing, they would be treated as a period cost and deducted directly from the total contribution margin to arrive at the net operating income, resulting in a net operating income of $30,000 ($36,800 contribution margin minus $6,800 fixed manufacturing overhead costs).

Under absorption costing, both variable and fixed manufacturing costs are included in product costs. Moore's total manufacturing costs per unit would be $4.56 ($10,000 variable manufacturing costs for the year plus $6,800 fixed manufacturing overhead costs for the year, divided by 5,000 units produced). The cost of goods sold for the year would be $20,960 (4,600 units sold multiplied by $4.56 total manufacturing costs per unit). The contribution margin would be $8.44 per unit ($20 selling price per unit minus $11.56 total manufacturing costs per unit). The total contribution margin would be $38,864 (4,600 units sold multiplied by $8.44 contribution margin per unit). Since fixed manufacturing overhead costs are included in product costs under absorption costing, they would be allocated to the units sold and the units in ending inventory ($4.56 total manufacturing costs per unit multiplied by 5,000 units produced equals $22,800 total manufacturing overhead costs for the year). The fixed manufacturing overhead costs allocated to the units sold would be $20,960 (4,600 units sold multiplied by $4.56 fixed manufacturing overhead costs per unit). The fixed manufacturing overhead costs allocated to the units in ending inventory would be $1,840 (400 units in ending inventory multiplied by $4.56 fixed manufacturing overhead costs per unit). As a result, the net operating income under absorption costing would be $30,864 ($38,864 contribution margin minus $22,800 fixed manufacturing overhead costs allocated to units sold minus $1,840 fixed manufacturing overhead costs allocated to units in ending inventory).

The difference between net operating income under absorption costing and net operating income under variable costing is $544 ($30,864 net operating income under absorption costing minus $30,000 net operating income under variable costing). Therefore, the correct answer is B.

Moore Company Produces a Single Product