Company A's inventory increased 525 units over the prior year end. Its variable manufacturing costs are $6 per unit and fixed costs for the period were $275,000. During the current year, Company A produced 12,500 units. Absorption costing net income will be:

Question

Quizplus · Accepted Answer

With absorption costing, fixed production costs are included in the cost of inventory and are not expensed until the inventory is sold. Since Company A's inventory increased by 525 units, fixed production costs of $275,000 were added to inventory (525 units x $525 per unit). This means that absorption costing net income will be higher than direct costing net income, which only includes the variable manufacturing costs in inventory. The difference will be equal to the amount of fixed production costs per unit multiplied by the number of units in ending inventory, which is $275,000/12,500 units = $22 per unit. Therefore, absorption costing net income will be $22 per unit x 525 units = $11,550 higher than direct costing net income.

Company A's Inventory Increased 525 Units Over the Prior Year