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During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials,...

During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials, $7 per unit, Direct labor, $5 per unit, Variable overhead, $6 per unit, and Fixed overhead, $270,000. The company produced 27,000 units, and sold 18,500 units, leaving 8,500 units in inventory at year-end. Income calculated under variable costing is determined to be $355,000. How much income is reported under absorption costing?

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Answer #1

Value of inventory under absorption costing = (7+5+6+270000/27000)*8500 = $238,000

Value of inventory under variable costing = (7+5+6)*8500 = $153,000

Income reported under absorption costing = $355000-153000+238000 = $440,000

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