Flint Enterprises had the following cost and production information for May: Inventory increased by 2,000 units during May.How much greater will Flint Enterprises' income be under absorption costing than under variable costing?
A)$16,000
B)$32,000
C)$368,000
D)$400,000

Question

Flint Enterprises had the following cost and production information for May:  Inventory increased by 2,000 units during May.How much greater will Flint Enterprises' income be under absorption costing than under variable costing?
A)$16,000 
B)$32,000 
C)$368,000 
D)$400,000

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing costs are included in the cost of goods sold calculation. 
Therefore, the difference in income between absorption and variable costing is equal to the change in ending inventory multiplied by the fixed manufacturing cost per unit.

Change in ending inventory = 2,000 units

Fixed manufacturing cost per unit = ($200,000 fixed manufacturing costs + $800,000 variable manufacturing costs) / 40,000 units produced = $25 per unit

Difference in income = 2,000 units x $25/unit = $50,000

However, the question is asking for the difference in income under absorption costing compared to variable costing. Therefore, we need to subtract the difference in variable costs between the two methods:

Difference in variable costs per unit = $800,000 / 40,000 units produced = $20 per unit

Adjustment to difference in income = 2,000 units x $20/unit = $40,000

Final difference in income = $50,000 - $40,000 = $10,000

Since the question asks for how much greater income will be under absorption costing than variable costing, we need to choose option B, which represents the correct difference in income between the two methods.

Flint Enterprises Had the Following Cost and Production Information for May