Krepps Corporation produces a single product. Last year, Krepps manufactured 20,

Question

Krepps Corporation produces a single product. Last year, Krepps manufactured 20,000 units and sold 15,000 units. Production costs for the year were as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $170,000 $110,000 $200,000 $240,000 Sales totaled $825,000 for the year, variable selling and administrative expenses totaled $108,000, and fixed selling and administrative expenses totaled $165,000. 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: Multiple Choice $101,250 lower than under absorption costing. $60,000 lower than under absorption costing $101,250 higher than under absorption costing. $60,000 higher than under absorption costing

Explanation / Answer

The Absorption costing method would defer Fixed mfg overhead due to inclusion of fixed costs in inventory valueation. The fixed cost deferred would be 240000*5000/20000 = $       60,000 Hence, under variable costing, the company's NOI would be $60000 lower than under absorption costing.

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