A company that produces a single product had a net operating income of $82,000 u

Question

A company that produces a single product had a net operating income of $82,000 using variable costing and a net operating income of $108,790 using absorption costing. Total fixed manufacturing overhead was $54,570 and production was 10,700 units both this year and last year. Last year was the first year of operations. Between the beginning and the end of the year, the inventory level:

A) increased by 26,790 units

B) increased by 5,253 units

C) decreased by 5,253 units

D) decreased by 26,790 units

Explanation / Answer

Fixed manufacturing overhead = $54,570

Production = 10,700 units

Fixed overhead per unit = $54,570 / 10,700 units = $5.10 per unit

Difference in net operating income under two methods = $108,790 - $82,000 = $26,790

This difference is due to the fixed overhead deferred in ending inventory and released in beginning inventory under absorption costing.

Hence, change in fixed manufacturing overhead of ending and beginning inventory = $26,790

Change in inventory level * Fixed overhead per unit = $26,790

Change in inventory level = $26,790/$5.10 = 5,252.94 i.e.5,253 units

Hence answer is B) increased by 5,253 units

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