- Apex Manufacturing produces at varying levels throughout the year. In Q1, they produced 30,000 units and sold 25,000 units. In Q2, they produced 20,000 units and sold 35,000 units. Fixed manufacturing overhead is $480,000 annually ($120,000 per quarter), and normal capacity is 25,000 units per quarter. Variable manufacturing cost is $16 per unit. Assuming no beginning inventory, what is the difference in reported net income between absorption and variable costing for the first half of the year?
Answer: The methods show identical income since production equals sales over the six-month period
Over the six-month period, total production equals total sales (50,000 units each). When cumulative production equals cumulative sales, the total fixed overhead expensed under both methods is identical, resulting in equal net income. Q1 defers overhead in inventory under absorption costing, while Q2 releases it, and these effects exactly offset over the combined period. Volume variances affect both methods equally since they're expensed in the period incurred. Choices A and D incorrectly focus on individual quarter effects rather than cumulative results. Choice B incorrectly suggests volume variances create differences between the methods.
- Acme Corp uses a normal capacity of 50,000 units to establish its fixed overhead rate. In Year 1, actual production was 45,000 units and sales were 48,000 units. In Year 2, actual production was 55,000 units and sales were 52,000 units. Fixed manufacturing overhead was $300,000 each year. Assuming no beginning inventory in Year 1, how does the two-year cumulative net income compare between absorption and variable costing?
Answer: The cumulative net income is identical under both methods since total production equals total sales
Over the two-year period, total production was 100,000 units (45,000 + 55,000) and total sales were 100,000 units (48,000 + 52,000). When cumulative production equals cumulative sales over multiple periods, the total amount of fixed overhead expensed under both methods is identical, resulting in equal cumulative net income. The timing differences in individual years cancel out. Choices A and C incorrectly focus on inventory changes in individual periods rather than cumulative results. Choice B incorrectly attributes differences to production volume variances rather than recognizing the cumulative equality.
- In a year when Phoenix produces 26,000 units but sells only 22,000 units (with no beginning inventory), and considering that actual fixed manufacturing overhead was $375,000 instead of budgeted $360,000, how much higher is absorption costing net income compared to variable costing net income?
Answer: $60,000 higher due to deferred fixed overhead in ending inventory using standard rates
Under standard absorption costing, the fixed overhead rate is $360,000 ÷ 24,000 = $15 per unit. Ending inventory is 4,000 units (26,000 - 22,000), which defers $60,000 of fixed overhead under absorption costing. The $15,000 spending variance ($375,000 - $360,000) is typically expensed in the current period and affects both methods equally, so it doesn't impact the difference between methods. Choice B incorrectly reduces the difference by some variance amount. Choice C incorrectly uses actual rather than standard overhead rates for inventory valuation. Choice D uses a hybrid calculation that doesn't reflect standard absorption costing principles.
- Delta Manufacturing's absorption costing income statement shows net income of $85,000. The company produced 12,000 units, sold 10,000 units, and had no beginning inventory. Fixed manufacturing overhead totaled $180,000, and the company uses normal capacity of 15,000 units to set overhead rates. Variable manufacturing costs are $30 per unit. What would net income be under variable costing?
Answer: $61,000 because fixed overhead in ending inventory increases absorption costing income
Fixed overhead rate = $180,000 ÷ 15,000 = $12 per unit. Under absorption costing, ending inventory of 2,000 units defers $24,000 of fixed overhead (2,000 × $12). However, there's also an unfavorable volume variance of $36,000 because actual production (12,000) was less than normal capacity (15,000), and this variance is expensed in the current period under absorption costing. The net effect is that absorption costing income is $24,000 higher than variable costing income ($85,000 - $24,000 = $61,000). Choice B incorrectly adds the variance effect. Choice C incorrectly assumes the effects cancel. Choice D uses an arbitrary combination.
- If the beginning inventory was produced when the fixed overhead rate was $10 per unit, and Meridian uses FIFO inventory flow, what adjustment to variable costing net income is needed to arrive at absorption costing net income?
Answer: Add $12,500 because the net increase in inventory units carries the current period's fixed overhead rate
Current fixed overhead rate = $225,000 ÷ 18,000 = $12.50 per unit. Under FIFO, beginning inventory (2,000 units) is sold first. Ending inventory is 3,000 units (2,000 + 15,000 - 14,000) from current production. The net increase in inventory is 1,000 units (3,000 - 2,000). This net increase carries current period overhead at $12.50 per unit, creating a $12,500 increase in deferred overhead costs, making absorption costing income higher by this amount.
- During 2024, Zenith produced 18,000 units and sold 16,500 units at $75 per unit. There was no beginning inventory. What is the difference between absorption costing net income and variable costing net income for 2024?
Answer: Absorption costing net income is $18,000 higher than variable costing net income
The fixed overhead rate per unit is $240,000 ÷ 20,000 = $12 per unit. Since 18,000 units were produced and 16,500 were sold, 1,500 units remain in ending inventory. Under absorption costing, the fixed overhead in ending inventory (1,500 × $12 = $18,000) is deferred to the next period, making absorption costing income $18,000 higher than variable costing income. Choice B reverses the relationship. Choices C and D incorrectly use production volume (18,000 - 16,500 = 1,500, then 1,500 × $12 = $18,000) but arrive at $20,000, likely confusing unit calculations.
