Vision Tester, Inc., a manufacturer of optical glass, began operations on February 1 of the current year. During this time, the company produced 900,000 units and sold 800,000 units at a sales price of $12 per unit. Cost information for this year is shown in the following table: Given this information, which of the following is true?
A) Net income under variable costing will exceed net income under absorption costing by $50,000.
B) Net income under absorption costing will exceed net income under variable costing by $50,000.
C) Net income will be the same under both absorption and variable costing.
D) Net income under variable costing will exceed net income under absorption costing by $60,000.
E) Net income under absorption costing will exceed net income under variable costing by $60,000.

Question

Vision Tester, Inc., a manufacturer of optical glass, began operations on February 1 of the current year. During this time, the company produced 900,000 units and sold 800,000 units at a sales price of $12 per unit. Cost information for this year is shown in the following table:  Given this information, which of the following is true?
A) Net income under variable costing will exceed net income under absorption costing by $50,000. 
B) Net income under absorption costing will exceed net income under variable costing by $50,000. 
C) Net income will be the same under both absorption and variable costing. 
D) Net income under variable costing will exceed net income under absorption costing by $60,000. 
E) Net income under absorption costing will exceed net income under variable costing by $60,000.

Quizplus · Accepted Answer

Under variable costing, only variable manufacturing costs are included in the cost of goods sold, while fixed manufacturing costs are treated as period costs and expensed in the period incurred. Under absorption costing, both variable and fixed manufacturing costs are included in the cost of goods sold. As Vision Tester produced more units than it sold (900,000 - 800,000 = 100,000), there will be inventory left at the end of the year. This means that under absorption costing, some of the fixed manufacturing costs will be deferred to future periods when the inventory is sold, resulting in a higher net income than under variable costing. Therefore, option B is correct as the absorption costing net income will exceed the variable costing net income by the amount of deferred fixed manufacturing costs, which is $50,000 (the fixed overhead rate of $0.50 per unit multiplied by the 100,000 units of ending inventory).