Kluber,Inc.had net income of $900,000 based on variable costing.Beginning and ending inventories were 55,000 units and 52,000 units,respectively.Assume the fixed overhead per unit was $1.25 for both the beginning and ending inventory.What is net income under absorption costing?
A)$833,125
B)$903,750
C)$966,875
D)$896,250
E)$900,000

Question

Quizplus · Accepted Answer

Under absorption costing, fixed overhead costs are included in the product cost and become a part of inventory until the units are sold. To calculate net income under absorption costing, we need to add the fixed overhead cost per unit to the variable cost per unit and multiply that by the number of units sold.

Variable cost per unit = total variable costs ÷ number of units produced
= $900,000 ÷ (55,000 units - 52,000 units)
= $300 per unit

Fixed overhead cost per unit = fixed overhead costs ÷ number of units produced
= ($1.25 per unit x 55,000 units) + ($1.25 per unit x 52,000 units)
= $137,500

Total cost per unit under absorption costing = variable cost per unit + fixed overhead cost per unit
= $300 + $1.25
= $301.25

Number of units sold = units produced - ending inventory
= 55,000 units - 52,000 units
= 3,000 units

Net income under absorption costing = (total cost per unit x number of units sold) - fixed overhead costs in ending inventory
= ($301.25 x 3,000 units) - ($1.25 per unit x 52,000 units)
= $903,750

Therefore, the correct answer is D.