Jeter Corporation had net income of 221000 based on varlable

Jeter Corporation had net income of $221,000 based on varlable costing. Beginning and ending inventories were 6,900 units and 11,800 units, respectively. Assume the fixed overhead per unit was $5 for both the beginning and ending Inventory. What is net income under absorption costing? $280.00o o $245,500 O $270,000 O$314.50o O $22100o

Solution

Problem – Jeter Corporation

Solution:

Net Income under Absorption Costing

Absorption Costing includes direct materials cost, direct labor cost, variable manufacturing overhead AND fixed manufacturing overhead in product cost. So the Inventories are also valued at total manufacturing cost including fixed overhead costs.

So, we need to adjust the Fixed Manufacturing Overhead Cost portion in beginning and ending inventory.

We deduct fixed MFR OH portion in Beg Inventory from Variable Costing Income and Add Fixed MF OH portion in Ending Inventory in Variable Costing Income to find out the Net Income as per Absorption Costing.

Reconciliation between Variable Costing and Absorption Costing Net Income

$$

Net Income as per Variable Costing

$221,000

Deduct: Fixed Manufacturing Overhead Cost Portion in Beginning Inventory

(6,900 Units x $5)

-$34,500

Plus Fixed Manufacturing Overhead Cost Portion in Ending Inventory

(11,800 Units x $5)

$59,000

Net Income as per Absorption Costing

$245,500

Hence, the correct option is $245,500

Problem – Chance Inc

Manufacturing Margin = Total Sales – Total Variable Production Cost

= (3800 Units x $112) – (3,800 Units x $57)

= $425,600 - $216,600

= $209,000

Hence, the correct option is $209,000

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Reconciliation between Variable Costing and Absorption Costing Net Income
	$$
Net Income as per Variable Costing	$221,000
Deduct: Fixed Manufacturing Overhead Cost Portion in Beginning Inventory (6,900 Units x $5)	-$34,500
Plus Fixed Manufacturing Overhead Cost Portion in Ending Inventory (11,800 Units x $5)	$59,000
Net Income as per Absorption Costing	$245,500