Yuvil Corporation produces a single product. At the end of the company's first year of operations, 1,000 units of inventory remained on hand. Its variable manufacturing overhead cost is $45 per unit and its fixed manufacturing overhead cost is $10 per unit. Yuvil's absorption costing net operating income would be higher than its variable costing net operating income by:
A)$0
B)$10,000
C)$35,000
D)$45,000

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead is included in the cost of goods sold, while under variable costing, it is not. Since Yuvil had 1,000 units of ending inventory, that means $10,000 ($10 fixed overhead per unit x 1,000 units) of fixed overhead would be capitalized under absorption costing and not expensed until the units are sold in the future. Therefore, the difference in net operating income between absorption costing and variable costing would be equal to the amount of fixed overhead in ending inventory, which is $10,000.

Yuvil Corporation Produces a Single Product