Union Corporation manufactures and sells one product. The following information pertains to the company's first year of operations: The company does not have any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, the company produced 24,000 units and sold 17,000 units. The company's only product is sold for $232 per unit.Assume that the company uses an absorption costing system that assigns $22 of direct labor cost and $68 of fixed manufacturing overhead to each unit that is produced. The net operating income under this costing system is:
A) $(102,000)
B) $374,000
C) $(830,000)
D) $(256,000)

Question

Union Corporation manufactures and sells one product. The following information pertains to the company's first year of operations:  The company does not have any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, the company produced 24,000 units and sold 17,000 units. The company's only product is sold for $232 per unit.Assume that the company uses an absorption costing system that assigns $22 of direct labor cost and $68 of fixed manufacturing overhead to each unit that is produced. The net operating income under this costing system is:
A) $(102,000) 
B) $374,000 
C) $(830,000) 
D) $(256,000)

Quizplus · Accepted Answer

Absorption costing assigns both fixed and variable manufacturing overhead costs to the cost of the product, whereas variable costing only assigns variable manufacturing overhead costs to the cost of the product.

Under absorption costing, the cost of each unit is:

Direct materials: $82
Direct labor: $22
Fixed overhead: $68
Total cost: $172

Therefore, the total cost of producing 24,000 units is:

24,000 units x $172 per unit = $4,128,000

Of these 24,000 units, only 17,000 were sold, leaving 7,000 units in ending inventory. The cost of these 7,000 units is:

7,000 units x $172 per unit = $1,204,000

The cost of goods sold is:

17,000 units x $172 per unit = $2,924,000

The revenue from selling these 17,000 units is:

17,000 units x $232 per unit = $3,944,000

Therefore, the net operating income is:

Revenue - Cost of goods sold - Fixed overhead deferred in inventory
= $3,944,000 - $2,924,000 - $1,204,000
= $374,000

The correct answer is B: $374,000.

Union Corporation Manufactures and Sells One Product