Krepps Corporation produces a single product. Last year, Krepps manufactured 33,910 units and sold 28,100 units. Production costs for the year were as follows:

Krepps Corporation produces a single product. Last year, Krepps manufactured 33,910 units and sold 28,100 units. Production costs for the year were as follows:

Direct materials	$	247,543
Direct labor	$	176,332
Variable manufacturing overhead	$	284,844
Fixed manufacturing overhead	$	474,740

Sales totaled $1,405,000 for the year, variable selling and administrative expenses totaled $148,930, and fixed selling and administrative expenses totaled $247,543. 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

• $35,441 lower than under absorption costing.
• $81,340 lower than under absorption costing.

  Correct
• $81,340 higher than under absorption costing.
• $35,441 higher than under absorption costing.

Explanation

Units in ending inventory = Units in beginning inventory + Units produced – Units sold

= 0 units + 33,910 units − 28,100 units = 5,810 unit

Fixed manufacturing overhead per unit = Fixed manufacturing overhead ÷ Units produced

= $474,740 ÷ 33,910 units = $14 per unit

Manufacturing overhead deferred in (released from) inventory = Fixed manufacturing overhead in ending inventory – Fixed manufacturing overhead in beginning inventory = ($14 per unit × 5,810 units) – $0 = $81,340

Therefore, variable costing net operating income will be $81,340 lower than absorption costing net operating income.