Question

During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials, $5 per unit, Direct labor, $3 per unit, Variable overhead, $4 per unit, and Fixed overhead, $250,000. The company produced 25,000 units, and sold 20,000 units, leaving 5,000 units in inventory at year-end. Income calculated under variable costing is determined to be $315,000. How much income is reported under absorption costing?

Answer 1

Answer: $365,000 ⇒ This is the income that is observed under absorption costing.

Explanation:

Given that,

Following are the manufacturing costs of McCormick Company:

Direct materials = $5 per unit

Direct labor = $3 per unit

Variable overhead = $4 per unit

Fixed overhead = $250,000

Total units produced by a company = 25,000 units

Total units sold by a company = 20,000 units

Remaining units is for year-end inventory = 5,000 units

Income under Variable costing = $3,15,000

∴ Fixed overhead per unit = $\frac{Fixed\ overhead}{Total\ units\ produced\ by\ a\ company}$

= $\frac{ 250000}{25000}$

= $10 per unit

So,

Fixed overhead cost in year-end inventory = Remaining units is for year-end inventory \times Fixed overhead per unit

= 5000 units \times $10

= $50,000

Hence,

Income under absorption costing = Income under variable costing + Fixed overhead cost in year-end inventory - Fixed overhead cost in beginning inventory

= $315,000 + $50,000 - $0

= $365,000 ⇒ This is the income that is observed under absorption costing.