Question

Krepps Corporation produces a single product. Last year, Krepps manufactured 35,040 units and sold 29,600 units. Production costs for the year were as follows:

Direct materials	$	266,304
Direct labor	$	157,680
Variable manufacturing overhead	$	297,840
Fixed manufacturing overhead	$	385,440

Sales totaled $1,450,400 for the year, variable selling and administrative expenses totaled $156,880, and fixed selling and administrative expenses totaled $255,792. There was no beginning inventory. Assume that direct labor is a variable cost.

Under variable costing, the company's net operating income for the year would be:

Multiple Choice

• $33,184 higher than under absorption costing.

• $59,840 lower than under absorption costing.

• $33,184 lower than under absorption costing.

• $59,840 higher than under absorption costing.

Answer 1

Solution:

Krepps Corporation
Variable costing income statement
Particulars	Per unit	Amount
Sales	$49.00	$1,450,400.00
Variable cost:
Direct material	$7.60	$224,960.00
Direct labor	$4.50	$133,200.00
Variable manufacturing overhead	$8.50	$251,600.00
Variable selling and administrative	$5.30	$156,880.00
Contribution margin	$23.10	$683,760.00
Fixed Expenses:
Fixed manufacturing overhead		$385,440.00
Fixed selling and administrative expenses		$255,792.00
Net Income		$42,528.00

Krepps Corporation
Absorption costing income statement
Particulars		Amount
Sales		$1,450,400.00
Cost of goods sold:
Beginning inventory	$0.00
Cost of goods produced	$1,107,264.00
Ending inventory	$171,904.00
Cost of goods sold		$935,360.00
Gross profit		$515,040.00
Selling and administrative expenses:
Variable selling and administrative		$156,880.00
Fixed selling and administrative expenses		$255,792.00
Net Income		$102,368.00

Under variable costing company's operating income would be $59,840 lower than under absorption costing.

Hence 2nd option is correct.