Question

During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials, $6 per unit, Direct labor, $4 per unit, Variable overhead, $5 per unit, and Fixed overhead, $240,000. The company produced 30,000 units, and sold 20,000 units, leaving 10,000 units in inventory at year-end. Income calculated under variable costing is determined to be $370,000. How much income is reported under absorption costing?
a. $370,000
b. $290,000
c. $610,000
d. $450,000

Answer 1

Answer: d. $450,000

Explanation:

In absorption costing, the fixed costs are absorbed by the products so that the cost of goods sold is inclusive of fixed costs.

First find the fixed overhead for the ending inventory:

= Fixed overhead per unit * Number of units in ending inventory

= 240,000 / 30,000 * 10,000

= $80,000

This is the fixed overhead that is deferred to the next year.

Income under absorption costing = Income under variable costing + Fixed overhead deferred:

= 370,000 + 80,000

= $450,000