Question

Jeter corporation had net income of $212,000 based on variable costing. beginning and ending inventories were 6,000 units and 10,000 units, respectively. assume the fixed overhead per unit was $4 for both the beginning and ending inventory. what is net income under absorption costing?

Answer 1

The answer is "$228,000".


net income of based on variable costing = $212,000
beginning and ending inventories were 6,000 units and 10,000 units
fixed overhead per unit = $4
This is how we calculate the net income under absorption costing;

$212,000 + (10,000 units × $4) – (6,000 × $4)

= $228,000

Answer 2

Answer: Net Income under absorption costing will be $228,000.

Explanation:

Marginal and absorption costing are two different methods to deal with fixed production overheads and and decide whether or not they are included in valuation of inventory.

• Valuation of inventory - opening and closing inventory are valued at variable cost under variable costing.  Whereas in absorption costing, opening and closing inventory are valued at full production cost.

• Fixed costs: Under variable costing, fixed costs actually incurred are deducted from contribution earned in order to determine the profit or loss for the period. Whereas in absorption costing, fixed cost becomes part of full production cost and an adjustment for under or over absorption of overheads is required.

Reconciling profits reported under two different methods

• When inventory levels increase or decrease during a period then profits will differ under absorption and marginal costing.
• If inventory levels increase, absorption costing gives the higher profit.

Net Income under absorption costing = Net Income under variable costing + [(Closing Inventory - Opening Inventory) x Fixed Overhead Per Unit

= $212,000 + [(10,000-6,000) x $4]

= $212,000 + $16000

=$228,000