Absorption Costing Question Managerial Accounting

Question

I need detailed help with steps on how to solve , and guidance as to where each number comes from :

 

In 2006 Voest's income under absorption costing was $15,000 higher than its income under variable costing. During the year the company produced 20,000 units. If total variable production costs were $80,000 and fixed manufacturing overhead was $40,000, how many units did the company sell in 2006 ?

A) 27,500 B) 12,500 C) 7500 D) 5000 E) None

 

Thanks

Answer 1

Under absorption costing, normal manufacturing costs are considered product costs and included in inventory, whether those costs relate to direct materials,direct labor, variable manufacturing overhead, or fixed manufacturing overhead.

So per the above definition the fixed manufacturing overhead amount of 40,000 will be inventoried under the absorption costing alone with the variable cost of 80,000. The fixed cost is $2 constant per unit and therefore since the income statement show 15,000 net income then the fixed cost allocated to the P&L was less by 15,000. The equation is 40,000 -15,000= 25,0000 fixed cost allocated to the P&L  and divide 25,000 by 2 Fixed cost per unit= 12,500 units sold in 2006.

This is  answer B) above.