Lockhart Products produces a single product.During 2009 the company incurred the following costs:
$\begin{array}{lr}
\text { Variable product costs } & \text {$ \$ 8.00 $ per unit } \
\text { Variable period costs } & \text {$ \$ 2.00 $ per unit } \
\text {Total fixed product costs } &\$21000\
\text { Total fixed period costs } &\$10000\
\end{array}$

Lockhart had no units in beginning inventory.During 2009,6000 units were produced and 5000 units were sold.Which of the following statements is true when comparing net income using absorption versus variable costing?
A) Net income will be $3500 higher using absorption costing than using variable costing.
B) Net income will be $3500 lower using absorption costing than using variable costing.
C) Net income will be $4200 higher using absorption costing than using variable costing.
D) Net income will be $4200 lower using absorption costing than using variable costing.

Question

Lockhart Products produces a single product.During 2009 the company incurred the following costs:
$\begin{array}{lr}
  \text { Variable product costs } & \text {$ \$ 8.00 $ per unit } \
 \text { Variable period costs } & \text {$ \$ 2.00 $ per unit  } \
 \text {Total fixed product costs  } &\$21000\
 \text { Total fixed period costs } &\$10000\
\end{array}$
 
Lockhart had no units in beginning inventory.During 2009,6000 units were produced and 5000 units were sold.Which of the following statements is true when comparing net income using absorption versus variable costing?
A) Net income will be $3500 higher using absorption costing than using variable costing.
B) Net income will be $3500 lower using absorption costing than using variable costing.
C) Net income will be $4200 higher using absorption costing than using variable costing.
D) Net income will be $4200 lower using absorption costing than using variable costing.

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead is allocated to each unit produced. This means that when more units are produced than sold, some of the fixed manufacturing overhead costs are deferred in inventory. In this case, 6000 units were produced and only 5000 were sold, leaving 1000 units in inventory. The fixed product cost of $21000 for 6000 units gives a per unit fixed cost of $3.50 ($21000/6000). For the 1000 units in inventory, this amounts to a deferred cost of $3500 ($3.50 * 1000) that would be recognized under absorption costing but not under variable costing, leading to a $3500 higher net income under absorption costing.

Lockhart Products Produces a Single Product Lockhart Had No Units in Beginning Inventory