Lee Company produces a single product. At the end of last year, the company had 30,000 units in its ending inventory. Lee's variable production costs are $10 per unit and its fixed manufacturing overhead costs are $5 per unit every year. The company's net operating income for the year was $12,000 higher under variable costing than under absorption costing. Given these facts, the number of units of product in inventory at the beginning of the year must have been:
A) 28,800 units
B) 27,600 units
C) 32,400 units
D) 42,000 units

Question

Quizplus · Accepted Answer

Under variable costing, the fixed manufacturing overhead costs are treated as a period cost and are expensed in full during the period incurred. On the other hand, under absorption costing, fixed manufacturing overhead costs are treated as a product cost and allocated to units produced during the period, including those in ending inventory.

Therefore, the difference in net operating income between the two methods is equal to the change in inventory units multiplied by the fixed manufacturing overhead per unit.

Using the formula: Change in Net Operating Income = Change in Inventory Units x Fixed Manufacturing Overhead per Unit

We can solve for the change in inventory units:
$12,000 = Change in Inventory Units x $5
Change in Inventory Units = $12,000 / $5 = 2,400 units

Since the ending inventory was 30,000 units, the beginning inventory must have been:
Beginning Inventory = Ending Inventory - Change in Inventory Units
Beginning Inventory = 30,000 - 2,400 = 27,600 units

Lee Company Produces a Single Product