Question

Powell Company had income of $1,158,300 under variable costing. Beginning and ending finished goods inventories were 7,800 units and zero units, respectively. Fixed overhead cost was $4 per unit for the beginning finished goods inventory. Income under absorption costing is: Multiple Choice $1,127,100. $1,165,900. $1,150700 $1188,700.

Answer 1

The income under absorption costing is $1,189,500.

Step-by-step explanation:

To calculate the income under absorption costing, we need to consider the fixed overhead costs that are included in the inventory. In this case, the beginning finished goods inventory had a fixed overhead cost of $4 per unit. Since there were 7,800 units in the beginning inventory, the fixed overhead cost for the inventory is 7,800 * $4 = $31,200.

Therefore, the total income under absorption costing is the income under variable costing ($1,158,300) plus the fixed overhead cost in the ending inventory ($31,200), which equals $1,158,300 + $31,200 = $1,189,500.

Answer 2

To calculate the income under absorption costing, multiply the beginning inventory by the fixed overhead cost per unit and add it to the variable costing income. In this case, the answer is $1,189,500, which is the result of adding $31,200 (7,800 units x $4) to the variable costing income of $1,158,300.

Step-by-step explanation:

The question is asking to calculate the income under absorption costing given the income under variable costing, the beginning and ending finished goods inventories, and the fixed overhead cost per unit for the beginning inventory. In absorption costing, all manufacturing costs, both variable and fixed, are allocated to units produced. In contrast, variable costing includes only variable production costs and excludes fixed overhead costs from product cost.

When the beginning inventory is higher than the ending inventory, as in this case from 7,800 units to zero units, it means that the fixed overhead costs that were allocated to the beginning inventory would now be fully absorbed into the income statement upon the sale of these goods. Therefore, the additional income recognized under absorption costing would be the beginning inventory units multiplied by the fixed overhead cost per unit.

The calculation is as follows:

1. Beginning Inventory: 7,800 units
2. Fixed overhead cost per unit: $4
3. Total fixed overhead cost absorbed: 7,800 units x $4/unit = $31,200
4. Income under absorption costing: $1,158,300 (variable costing income) + $31,200 (fixed overhead cost) = $1,189,500.