4. Use the following information to answer this question. Harris Company produce

Question

4. Use the following information to answer this question.
Harris Company produces a single product. Last year, Harris manufactured 17,000 units and sold 13,000 units. Production costs for the year were as follows:
Production Cost Data
Direct materials $153,000
Direct labor $110,500
Variable manufacturing overhead $204,000
Fixed manufacturing overhead $255,000
Sales were $780,000 for the year, variable selling and administrative expenses were $88,400, and fixed selling and administrative expenses were $170,000. 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 _______ than under absorption costing.
A. $60,000 higher

B. $108,000 higher

C. $108,000 lower

D. $60,000 lower

Explanation / Answer

Answer: 60,000 lower. Under variable costing, the fixed manufacturing costs is treated as a period cost. Under absorption costing, it is treated as a product cost. So the full 255,000 would be expensed under variable costing. Under absorption costing, only 255,000*13,000/17,000 = 195,000 would be expensed. This difference is 255,000 – 195,000 = 60,000. So under variable costing the expenses would have been 60,000 higher and thus net income would have been 60,000 lower.

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