Allston Products sells a special kind of effects pedal for musical performers. Each unit sells for $20.00. Additional data for the month of April, 2011, are as follows: $$\begin{array} { | l | r | l|}
\hline \text { Direct materials } & \$ 4.00& \text { per unit } \
\hline \text { Direct labor } & \$ 8.00 &\text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 20,000 &\text { per month } \
\hline \text { Fixed manufacturing overhead } & \$ 14,000& \text { per month } \
\hline \text { Operating expenses } & \$ 21,000& \text { per month } \
\hline & \
\hline \text { Beginning inventory } & 0 &\text { units } \
\hline \text { Units produced } & 8,000 &\text { units } \
\hline \text { Units sold } & 7,500& \text { units } \
\hline \text { Ending inventory } & 500& \text { units } \
\hline
\end{array}$$ Which of the following statements is true?

Question

Allston Products sells a special kind of effects pedal for musical performers. Each unit sells for $20.00. Additional data for the month of April, 2011, are as follows: $$\begin{array} { | l | r | l|} 
\hline \text { Direct materials } & \$ 4.00& \text { per unit } \
\hline \text { Direct labor } & \$ 8.00 &\text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 20,000 &\text { per month } \
\hline \text { Fixed manufacturing overhead } & \$ 14,000& \text { per month } \
\hline \text { Operating expenses } & \$ 21,000& \text { per month } \
\hline & \
\hline \text { Beginning inventory } & 0 &\text { units } \
\hline \text { Units produced } & 8,000 &\text { units } \
\hline \text { Units sold } & 7,500& \text { units } \
\hline \text { Ending inventory } & 500& \text { units } \
\hline
\end{array}$$ Which of the following statements is true?

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead is allocated to each unit produced, so some of it is included in the ending inventory. This results in higher operating income compared to variable costing, where all fixed manufacturing overhead is expensed in the period. The difference in operating income is the fixed manufacturing overhead per unit ($14,000/8,000 units = $1.75) multiplied by the change in inventory (500 units), which equals $875.

Allston Products Sells a Special Kind of Effects Pedal for Musical