16). Gourmet Food Company sell its product for $60 per unit. During 2017, it pro
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Question
16). Gourmet Food Company sell its product for $60 per unit. During 2017, it produced 60,000 units and sold 50,000 units (there was no beginning inventory or BI= 0). Costs per unit are: direct materials (DM) $15, direct labor (DL) $9, and variable overhead (VOH) $3. Fixed costs are: $720,000 (FOH) manufacturing overhead, and $90,000 (S&A) selling and administrative expenses. Net income under absorption costing is higher than net income under variable costing
A) when units produced (P) exceed units sold (S).
B) when units produced (P) equal units sold (S).
C) when units produced (P) are less than units sold (S).
D) regardless of the relationship between units produced (P) and units sold (S).
Explanation / Answer
Option A is the answer.
When units produced are higher than units sold, the net income of absorption costing is higher than net income of variable costing.
This is due to fixed manufacturing overheads being allocated to more number of Production units and thereby resulting in higher net income.
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