Docherty,Inc.reports the following information for the year ended December 31: $$\begin{array} { | l | r | c | }
\hline \text { Units sold } & 640 & \text { units } \
\hline \text { Sales price } & \$ 120 & \text { per unit } \
\hline \text { Direct materials } & \$ 28 & \text { per unit } \
\hline \text { Direct labor } & \$ 9 & \text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 15 & \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 12 & \text { per unit } \
\hline \text { Variable selling and administrative costs } & \$ 4 & \text { per unit } \
\hline \text { Fixed selling and administrative costs } & \$ 12,700 & \text { per year } \
\hline
\end{array}$$ The operating income calculated using variable costing and absorption costing amounted to $9400 and $11,200,respectively.There were no beginning inventories.Determine the total number of units produced during the year.
A) 640 units
B) 790 units
C) 15 units
D) 150 units

Question

Docherty,Inc.reports the following information for the year ended December 31: $$\begin{array} { | l | r | c | } 
\hline \text { Units sold } & 640 & \text { units } \
\hline \text { Sales price } & \$ 120 & \text { per unit } \
\hline \text { Direct materials } & \$ 28 & \text { per unit } \
\hline \text { Direct labor } & \$ 9 & \text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 15 & \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 12 & \text { per unit } \
\hline \text { Variable selling and administrative costs } & \$ 4 & \text { per unit } \
\hline \text { Fixed selling and administrative costs } & \$ 12,700 & \text { per year } \
\hline
\end{array}$$ The operating income calculated using variable costing and absorption costing amounted to $9400 and $11,200,respectively.There were no beginning inventories.Determine the total number of units produced during the year.
A) 640 units
B) 790 units
C) 15 units
D) 150 units

Quizplus · Accepted Answer

The difference between operating income under absorption costing and variable costing is due to the treatment of fixed manufacturing overhead. Under absorption costing, part of the fixed manufacturing overhead is allocated to the units produced and included in inventory, which affects the cost of goods sold and, consequently, the operating income. The difference in operating income ($11,200 - $9,400 = $1,800) is due to the fixed manufacturing overhead costs allocated to the units produced but not sold. Since the fixed manufacturing overhead cost per unit is $12, we can calculate the number of units produced but not sold as $1,800 / $12 = 150 units. Given that 640 units were sold and there were no beginning inventories, the total units produced were 640 units sold + 150 units not sold = 790 units.

Docherty,Inc The Operating Income Calculated Using Variable Costing and Absorption Costing