Jeter Corporation Had Net Income Of 216,000 Based On Variabl

1jeter Corporation Had Net Income Of 216000 Based On Variable Costin

Jeter Corporation reported a net income of $216,000 based on variable costing, with beginning inventory at 6,400 units and ending inventory at 10,800 units. The fixed overhead per unit was $6 for both the beginning and ending inventories. The core question is to determine the net income under absorption costing for the period.

Under variable costing, fixed manufacturing overhead is expensed in total during the period, whereas under absorption costing, a portion of fixed manufacturing overhead is included in inventory values. To compute net income under absorption costing, we need to adjust the variable costing net income by the fixed overhead costs deferred or released due to changes in inventory levels.

The change in inventory units is:

  • Ending inventory units = 10,800
  • Beginning inventory units = 6,400
  • Increase in inventory = 10,800 - 6,400 = 4,400 units

Total fixed overhead deferred in inventory = 4,400 units × $6 = $26,400

Adjusted net income under absorption costing = Variable costing net income + Fixed overhead deferred in inventory

= $216,000 + $26,400 = $242,400

Sample Paper For Above instruction

Jeter Corporation's net income under variable costing and absorption costing illustrates the importance of understanding inventory valuation methods in managerial accounting. Variable costing considers only variable manufacturing costs in product costs, treating fixed manufacturing overhead as a period expense. By contrast, absorption costing assigns a portion of fixed overhead to inventory, affecting net income based on changes in inventory levels.

The key difference in this scenario is the change in inventory levels from the beginning to the end of the period. With a significant increase in inventory, some of the fixed overhead costs incurred are deferred in inventory rather than expensed immediately under absorption costing. Consequently, net income under absorption costing can be higher than under variable costing, reflecting the deferred fixed overhead in unsold inventory.

Calculating net income under absorption costing begins with adjusting the variable costing net income by the fixed overhead costs deferred or released due to inventory changes. The formula involves multiplying the change in inventory units by the fixed overhead per unit, then adding or subtracting this amount from the variable costing net income.

In this case, the increase in inventory units is 4,400, and with a fixed overhead per unit of $6, the fixed overhead deferred in inventory is $26,400. Therefore, the net income under absorption costing is $216,000 + $26,400 = $242,400.

This example emphasizes how inventory levels influence reported net income, and why managers must understand both costing methods for accurate financial analysis and decision-making.

References

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