Stephen Company produces a single product.Last year,the company had 20,000 units in its ending inventory.During the year,Stephen's variable production costs were $12 per unit.The fixed manufacturing overhead cost was $8 per unit in the beginning inventory.The company's net operating income for the year was $9,600 higher under variable costing than it was under absorption costing.The company uses a last-in-first-out (LIFO)inventory flow assumption.Given these facts,the number of units of product in the beginning inventory last year must have been:
A)21,200
B)19,200
C)18,800
D)19,520

Question

Quizplus · Accepted Answer

Since the variable costing operating net income was $9,600 higher under variable costing than under absorption costing,fixed manufacturing overhead costs must have been released from inventory under absorption costing.In other words,the ending inventory must have been lower than the beginning inventory.Under the LIFO inventory flow assumption,all of the units in ending inventory were also in beginning inventory.Therefore,the reduction in inventory must have been 1,200 units (= $9,600 F1F1F1S1F1F1F10 $8 per unit).
Units in ending inventory = Units in beginning inventory - Reduction in units in inventory
20,000 units = Units in beginning inventory - 1,200 units
Units in beginning inventory = 20,000 units + 1,200 units = 21,200 units

Stephen Company Produces a Single Product