Freetown Corporation incurred fixed manufacturing costs of $34,000 during 2017. Other information for 2017 includes:
The budgeted denominator level is 2,000 units.
Units produced total 1,800 units.
Units sold total 1,300 units.
Beginning inventory was zero.
The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.
Operating income using absorption costing will be ________ than operating income if using variable costing. (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)
A) $11,900 higher
B) $9,444 lower
C) $8,500 higher
D) $22,100 lower

Question

Quizplus · Accepted Answer

The fixed manufacturing expense attributable to each unit produced is $17.00 ($34,000/2,000 units). Different operating incomes are reported because the unit level of inventory increased during the accounting period by 500 units × $17.00 denominator rate = $8,500. Therefore, operating income is $8,500 higher under absorption costing because $8,500 of fixed manufacturing costs remains in inventory.

Freetown Corporation Incurred Fixed Manufacturing Costs of $34,000 During 2017