Direct materials, $7 per unit, Direct labor, $5 per unit, Variable overhead, $6 per unit, and Fixed overhead, $270,000. The company produced 27,000 units, and sold 18,500 units, leaving 8,500 units in inventory at year-end. Income calculated under variable costing is determined to be $355,000. How much income is reported under absorption costing

Income reported under absorption costing = $440,000

Explanation:

The income reported under absorption costing can be determined by adjusting the income under variable costing for difference in profit.

The steps are outlined below:

Step 1

Calculate the Overhead absorption rate

OAR = Budgeted Fixed overhead / Budgeted number of units

= $270,000 / 27,000 units

= $10

Step 2

Calculate the change in inventory

8500 units (given)

Step 3

Calculate the difference in profit =

Difference in profit = OAR * change in inventory

=8500*$10

= $85000

Step 4

Calculate Income under absorption costing

= Income under variable costing + Difference in profit

=$85,000 + $355,000

=$440,000

Income reported under absorption costing = $440,000