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Chapter 19: 13QS (page 869)

Mortech had net income of \(250,000 based on variable costing. Beginning and ending inventories were 50,000 units and 48,000 units, respectively. Assume the fixed overhead per unit was \)0.75 for both the beginning and ending inventory. What is net income under absorption costing?

Short Answer

Expert verified

Net income under absorption costing is$248,500.

Step by step solution

01

Meaning of Net Income

The term net income refers to the amount of money left in the hand of a business concern after the settlement of all the associated expenses. All operating and non-operating expenses are deducted to compute net income from the revenues.

02

Computation of net income under absorption costing

Particulars

Amounts ($)

Net income under variable costing

250,000

Less: Change in units in inventory (2000*0.75)

(1,500)

Net income under absorption costing

$248,500

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Most popular questions from this chapter

When units produced exceed units sold for a reporting period,would income under variable costing be greater than,equal to, or less than income under absorption costing? Explain.

Hayek Bikes prepares the income statement under variable costing for its managerial reports, and it prepares the income statement under absorption costing for external reporting. For its first month of operations, 375 bikes were produced and 225 were sold; this left 150 bikes in ending inventory. The income statement information under variable costing follows.

Sales (225 × \(1,600)

\)360,000

Variable product cost (225 × \(625)

140,625

Variable selling and administrative expenses (225 × \)65)

14,625

Contribution margin

204,750

Fixed overhead cost

56,250

Fixed selling and administrative expense

75,000

Net income

$73,500

1. Prepare this company’s income statement for its first month of operations under absorption costing.

2. Explain the difference in income between the variable costing and absorption costing income statements.

MidCoast Airlines provides charter airplane services. In October of this year, the company is operating at 60% of its capacity when it receives a bid from the local community college. The college is organizing a Washington, D.C., trip for its international student group. The college budgeted only \(30,000 for roundtrip airfare. MidCoast Airlines normally charges between \)50,000 and \(60,000 for such service. MidCoast determines its cost for the round-trip flight to Washington to be \)44,000, which consists of the following:

Variable cost

\(15,000

Fixed cost (allocated)

29,000

Total cost

\)44,000

Although the manager at MidCoast supports the college’s educational efforts, she cannot justify accepting the \(30,000 bid for the trip given the projected \)14,000 loss. Still, she decides to consult with you, an independent financial consultant. Do you believe the airline should accept the bid from the college? Prepare a memorandum, with supporting computations, explaining why or why not.

Aces Inc., a manufacturer of tennis rackets, began operations this year. The company produced 6,000 rackets and sold 4,900. Each racket was sold at a price of \(90. Fixed overhead costs are \)78,000, and fixed selling and administrative costs are \(65,200. The company also reports the following per unit variable costs for the year. Prepare an income statement under absorption costing.

Variable product costs \)25.00

Variable selling and administrative expenses 2.00

Hong Co. had net income of \(386,100 under variable costing. Beginning and ending inventories were 2,600 units and 3,900 units, respectively. Fixed overhead cost was \)4.00 per unit for both the beginning and ending inventory. What is net income under absorption costing?
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