Question

Carr Company produces a single product. During the past year, Carr manufactured 29,010 units and sold 23,900 units. Production costs for the year were as follows: Direct materials $214,674 Direct labor $121,842 Variable manufacturing overhead $243,684 Fixed manufacturing overhead $319,110 Sales were $1,159,150 for the year, variable selling and administrative expenses were $126,670, and fixed selling and administrative expenses were $205,971. There was no beginning inventory. Assume that direct labor is a variable cost. Under variable costing, the company's net operating income for the year would be:______.

a. $56,210 lower than under absorption costing.
b. $30,149 lower than under absorption costing.
c. $56,210 higher than under absorption costing.
d. $30,149 higher than under absorption costing.

Answer 1

Net income under variable costing is $56,210 lower than absorption costing.

Step-by-step explanation:

The difference between absorption costing and variable costing methods is that the first one includes fixed manufacturing overhead as a product cost.

When there isn't beginning inventory, and there are units in ending inventory, the net income will be higher in absorption costing.

The difference is fixed manufacturing overhead allocated in ending inventory units.

Fixed overhead in ending inventory= 5,110units*(319,110/29,010)

Fixed overhead in ending inventory=$56,210

Net income under variable costing is $56,210 lower than absorption costing.