Nunya Company reported the following information for the first three years of op
ID: 2564090 • Letter: N
Question
Nunya Company reported the following information for the first three years of operations Year1 Year2 Year 3 15,00020,000 24,000 12,00019,200 26,000 Units produced Units solod Variable production cost per unit Fixed production cost Variable selling cost per unit Fixed selling cost Normal overhead base (in units) $4 $24,000 $24,000 $24,000 $3 $14,000 $14,000 $14,000 20,00024,000 16,000 $3 $3 Assume fixed overhead is applied based on the normal overhead base for each year. (1 point) If the company had an operating income of $18,500 in Year 2 under variable costing, what was their operating income under absorption costing in Year 2? 4· a. $22,300 b. $18,300 c. $19,300 d. $19,460 e. $18,260 f. $18,700 g. $19,780 h. None of the aboveExplanation / Answer
Net Operating Income under Variable Costing = $ 18,500
Add : Fixed manufacturing Overhead deferred in Inventory ((800) * 1) (See Supportive Calculations as well)
(Change in Inventory * Fixed Production Overhead per unit) = 800
Net Operating Income under Absorbtion Costing = $ 19,300
Ans. C. $19,300.
Explanation : The difference in Operating Income under Variable and Absorbtion costing arises due to the deferment of Fixed production Overhead to the next year via Inventory. In absorbtion Costing, the Fixed production overhead becomes the part of ending inventory. Hence, the Profit under absorbtion costing would increase in case there is positive change in the Inventory and vice-versa.
Supportive Calculations :
1.Opening Inventory for Year 2 = Units Produced - Units Sold in Year 1
= 15,000 - 12,000
= 3,000 units
2.Closing Inventory for Year 2 = Opening Inventory + Units Produced - Units sold
= 3,000 + 20,000 - 19,200
= 3,800 Units
3. Change in inventory(Increase) = Closing Inventory - Opening Inventory
= 3,800 - 3,000 = 800 units
4.Fixed Factory Overhead per Unit = Fixed Production cost / Normal Overhead Base
= $24,000 / 24,000 = $1
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