Baylor, Inc. just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: Year 1 Year 2
Sales $ 40,000 $120,000
Variable cost of goods sold $22,000 $66,000
Variable selling and administration 800 22,800 2,400 68,400
Contribution margin 17,200 51,600
Fixed overhead 30,000 30,000
Fixed selling and administration 15,000 45,000 15,000 45,000
Operating income $(27,800)$ 6,600
The operating income for year 2 using absorption costing would be:
A)$(9,800)
B)$600
C)$(9,000)
D)$6,000

Question

Quizplus · Accepted Answer

Under absorption costing, fixed overhead is allocated to each unit produced. In Year 1, 600 units (1,000 produced - 400 sold) were added to inventory, deferring $18,000 of fixed overhead (600 units x $30/unit). In Year 2, these 600 units were sold, releasing the deferred $18,000 to the income statement, increasing operating income by $18,000. Thus, the absorption costing operating income for Year 2 is $6,600 (variable costing income) + $18,000 = $24,600. However, the fixed overhead per unit for Year 2 is $30,000/1,000 = $30. The cost of goods sold under absorption costing is $66,000 + $18,000 = $84,000. The operating income is $120,000 - $84,000 - $15,000 = $21,000. The difference between variable and absorption costing is $21,000 - $6,600 = $14,400. Therefore, the correct answer is $600.