This is a new company just beginning operations. That fact tells us that the beginning inventory was zero. If the ending inventory is also zero, as in this answer choice, that tells us that all of the units the company produced during its first year of operation were sold during that year. Under all the ways of allocating manufacturing overhead to units produced, there would have been some variance between the actual incurred overhead and overhead allocated to production as the year passed. However, at the end of the year, the variances between the actual amount incurred and the amount of costs applied to the units produced would have been resolved, either by closing them out to COGS only or by allocating them between COGS and Ending Inventory. If ending inventory was zero, though, all of the variances would have been closed out only to COGS, regardless of which method of closing out variances the company was using. Since all production for the year was sold, 100% of actual costs incurred during the year would have been in COGS, regardless of whether a plantwide rate, a departmental rate, or activity based costing had been used. The amounts applied under each of the methods would have been different. However, when the amounts applied and the adjustments made to the COGS account to close out the variances were combined, the total amount of overhead in COGS expense would have been the same under all the methods. Sometimes it is easier to see something like this when you use numbers. So let’s say that the actual overhead incurred by Young Company during the year was $1,000,000. And let’s say that overhead applied under the various methods would have been as follows: Plantwide rate, $993,000 Departmental rates, $995,000 Activity Based Costing, $997,000 Using a plantwide rate, with total actual overhead incurred of $1,000,000, $993,000 would have been applied during production and all of that cost would have flowed to COGS because all of the production was sold. The variance between actual incurred overhead of $1,000,000 and applied overhead of $993,000, or $7,000, would have been closed out by debiting COGS for $7,000. Total overhead in COGS reported on the income statement would have been equal to the actual overhead incurred, or $1,000,000. Using departmental rates, with total actual overhead incurred of $1,000,000, $995,000 would have been applied during production and all of that cost would have flowed to COGS because all of the production was sold. The variance between actual incurred overhead of $1,000,000 and applied overhead of $995,000, or $5,000, would have been closed out by debiting COGS for $5,000. Total overhead in COGS reported on the income statement would have been equal to the actual overhead incurred, or $1,000,000. Using Activity Based Costing, with total actual overhead incurred of $1,000,000, $997,000 would have been applied during production and all of that cost would have flowed to COGS because all of the production was sold. The variance between actual incurred overhead of $1,000,000 and applied overhead of $997,000, or $3,000, would have been closed out by debiting COGS for $3,000. Total overhead in COGS reported on the income statement would have been equal to the actual overhead incurred, or $1,000,000. We can say this for certain only because all of the production was sold during the year. If some of the units produced had remained in inventory, unsold at the end of the year, the three different ways of applying the overhead to production may have resulted in three different divisions between COGS and Ending Inventory of the $1,000,000 overhead incurred during the year.
Production costs that are close to those that were budgeted would not cause reported net income to be the same for the first year regardless of which overhead allocation method had been selected. See correct answer for a full explanation.
All manufacturing overhead being fixed would not cause reported net income to be the same for the first year regardless of which overhead allocation method had been selected. See correct answer for a full explanation.
A sales mix that does not vary from the mix that was budgeted would not cause reported net income to be the same for the first year regardless of which overhead allocation method had been selected. See correct answer for a full explanation.
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