Ch 14 Var vs Abs Costing

7/29/2019 Ch 14 Var vs Abs Costing

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Variable Costing


2/60

Harvey Co. produces a single product with

the following information available:

Unit Cost Computations


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Unit product cost is determined as follows:

Selling and administrative expenses arealways treated as period expenses and

deducted from revenue.

Unit Cost Computations


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Harvey Co. had no beginning inventory,produced

25,000 units and sold 20,000 units this year.Absorption Costing

Sales (20,000 $30) 600,000$Less cost of goods sold:

Beginning inventory -$

Add COGM (25,000 $16) 400,000

Goods available for sale 400,000

Ending inventory (5,000 $16) 80,000 320,000

Gross margin 280,000Less selling & admin. exp.

Variable (20,000 $3) 60,000$

Fixed 100,000 160,000

Net operating income 120,000$

Income Comparison of Absorption

and Variable Costing


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Variable Costing

Sales (20,000 $30) 600,000$

Less variable expenses:

Beginning inventory -$Add COGM (25,000 $10) 250,000


Less ending inventory (5,000 $10) 50,000

Variable cost of goods sold 200,000

Variable selling & administrative

expenses (20,000 $3) 60,000 260,000Contribution margin 340,000

Less fixed expenses:

Manufacturing overhead 150,000$

Selling & administrative expenses 100,000 250,000


Now lets look at variable costing by Harvey Co.Variable

costsonly.

All fixedmanufacturing

overhead isexpensed.




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Lets compare the methods.




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Reconciliation

Variable costing net operating income 90,000$Add: Increase in fixed manufacturing

costs in inventory

(5,000 units $6 per unit) 30,000

Absorption costing net opearting income 120,000$

Fixed mfg. overhead $150,000Units produced 25,000 units

= = $6.00 per unit

We can reconcile the difference betweenabsorption and variable income as follows:


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Extending the Example

Lets look at thesecond yearof operations

for HarveyCompany.


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Harvey Co. Year 2In its second year of operations, Harvey Co. startedwith an inventory of 5,000 units,produced 25,000

units and sold 30,000 units.


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Harvey Co. Year 2

Unit product cost is determined as follows:

No change in Harveyscost structure.


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Absorption CostingSales (30,000 $30) 900,000$

Less cost of goods sold:

Beg. inventory (5,000 $16) 80,000$

Add COGM (25,000 $16) 400,000Goods available for sale 480,000

Less ending inventory - 480,000

Gross margin 420,000

Less selling & admin. exp.

Variable (30,000 $3) 90,000$Fixed 100,000 190,000


Harvey Co. Year 2

These are the 25,000 units

produced in the current period.


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Next, well look at Harveys second years

income statement assuming variable costingis used.


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Harvey Co. Year 2Variablecostsonly.

All fixedmanufacturing

overhead isexpensed.


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Reconciliation

Variable costing net operating income 260,000$Deduct: Fixed manufacturing overhead

costs released from inventory

(5,000 units $6 per unit) 30,000

Absorption costing net operating income 230,000$

We can reconcile the difference betweenabsorption and variable income as follows:

Fixed mfg. overhead $150,000Units produced 25,000 units

= = $6.00 per unit


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Summary


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Summary

*Note that this column implicitly assumes thatinventory units and fixed costs change in the samedirection.This relation may not hold when production

varies over time and unit fixed costs change fromperiod to period.


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The capitalization of fixed costs ininventories under absorption costing allowsmanagers to affect reported income. In thissense, earnings may be managed toachieve profit targets.

For example, if the fixed manufacturing costthat is included in the inventories increasesover a given period, then the amount of

profit reported will be higher underabsorption costing than under variablecosting.


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Projected operating result Absorption CostingSales (20,000 $30) 600,000$



Add COGM (25,000 $16) 400,000





Variable (20,000 $3) 60,000$Fixed 100,000 160,000


The ending inventory includes $30,000 of fixed overhead, and

cost of sales includes $120,000 of fixed overhead. These arepotential tools for earnings management. Assume a target of$20,000 additional income. Given that sales are expected to be20,000 units, what level of production is needed to reportincome of $140,000?


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Add COGM (25,000 $16) 400,000





Variable (20,000 $3) 60,000$Fixed 100,000 160,000


In order to report income of $140,000 it is necessary to assign

$50,000 of fixed cost to the ending inventory. One third of theperiods production must be in the inventory. This implies thatthe 20,000 units sold comprise 2/3 of total production, so totalproduction must be 30,000 units.


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Add COGM (30,000 $15) 450,000


Ending inventory (10,000 $15 150,000 300,000



Variable (20,000 $3) 60,000$Fixed 100,000 160,000


Note that the fixed cost per unit would be $5 ($150,000 /

30,000 units), and a total of $50,000 in fixed costs isincluded in the ending inventory. The absorption costingincome exceeds the variable costing income by $50,000.


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Advantages of the Contribution

(variable costing) Approach

Advantages

Classifies costs basedOn behavior

Profit is not affected by

changes in inventories.

Consistent with standardcosts and flexible budgeting.


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Handout 14 (a):

Variable and absorption costing,differing cost structures


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Handout 14(a):Variable and absorption costs; income statement analysisThe Patti, Maxine and LaVerne Divisions of the Andrews Company haveidentical amounts of revenue and operating income, but differ in their coststructures. The Patti Division is highly mechanized, and all manufacturing costs

are fixed. The Maxine Division has a mixture of fixed and variablemanufacturing costs. The LaVerne Divisions manufacturing costs are all

directly variable with production. Operating results for each of the threedivisions during the past year are shown below. Assume that each of thedivisions had no beginning or ending inventories.

DivisionsPatti Maxine LaVerne

Revenues $6,000,000 $6,000,000 $6,000,000Variable costs None $3,000,000 $4,800,000Fixed costs $4,800,000 $1,800,000 NoneOperating income $1,200,000 $1,200,000 $1,200,000

Divisions


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Revenues $6,000,000 $6,000,000 $6,000,000Variable costs None $3,000,000 $4,800,000

Fixed costs $4,800,000 $1,800,000 NoneOperating income $1,200,000 $1,200,000 $1,200,000

(a) If each of the divisions has a ten percent increase in revenues in the

coming year, what would be the resulting percentage increase inoperating income?

Divisions


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(a) If each of the divisions has a ten percent increase in revenues in the

coming year, what would be the resulting percentage increase inoperating income?

Patti: A ten percent increase in revenue provides an increase of

$600,000, or 50%. in operating income. Operating leverage is 5.0.

Maxine: A ten percent increase in revenue provides an increase of$300,000, or 25%. in operating income. Operating leverage is 2.5.

Laverne: A ten percent increase in revenue provides an increase of

$120,000, or 10%. in operating income. Operating leverage is 1.0.

Divisions


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(b)At what dollar amount of revenues would each of the divisions breakeven (i.e., report operating income of zero)?

The divisions break even when the total contribution margin isequal to total fixed cost.




Divisions


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(b)At what dollar amount of revenues would each of the divisions breakeven (i.e., report operating income of zero)?

The divisions break even when the total contribution margin isequal to total fixed cost.

Patti: Break-even occurs when total revenues equal $4,800,000.$4,800,000 x 100% = total fixed cost of $4,800,000.

Maxine: Break-even occurs when total revenues equal $3,600,000.$3,600,000 x 50% = total fixed cost of $1,800,000.

Laverne: Break-even occurs when total revenues equal zero.Total fixed cost is zero.





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Required:Assume instead that the divisions will each continue to report revenues of$6,000,000 in the coming year, and will also have ending inventories equal to25% of production (i.e., 75% of the items produced will be sold, and the

remaining 25% will be carried in the ending inventories).

(a) What would be the carrying value of the ending inventories for eachdivision? Of this amount, how much represents variable costs? Howmuch represents fixed costs?

(b) What amount of operating income would be reported by each of thedivisions in the coming year? Explain the reason why the operatingincomes would differ among the three divisions. (Hint: Compare thedifferences in divisional operating incomes to the differences across

divisions in the amounts of fixed costs assigned to the inventories)

Divisions


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Assume instead that the divisions will each continue to report revenues of

$6,000,000 in the coming year, and will also have ending inventories equalto 25% of production (i.e., 75% of the items produced will be sold, and theremaining 25% will be carried in the ending inventories).

Production must increase by one-third, because sales will be three-

quarters of production. Total fixed costs remain the same. One quarter

of the total variable and fixed manufacturing costs will be carried in

the ending inventory.

Patti Maxine LaVerne


The operating incomes will increase by the amount of fixed costs

added to the inventories over the period:

Patti: Operating income = $1,200,000 + $1,200,000 = $2,400,000

Maxine: Operating income = $1,200,000 + $450,000 = $1,650,000.

LaVerne: Operating income = $1,200,000 + 0 = $1,200,000.

Divisions


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Revenues $6,000,000 $6,000,000 $6,000,000Variable costs None $3,000,000 $4,800,000Fixed costs $4,800,000 $1,800,000 None

Operating income $1,200,000 $1,200,000 $1,200,000

The operating incomes will increase by the amount of fixed costs added to the inventories

over the period:

Patti: Operating income = $1,200,000 + $1,200,000 = $2,400,000.

Maxine: Operating income = $1,200,000 + $450,000 = $1,650,000.

LaVerne: Operating income = $1,200,000 + 0 = $1,200,000.

Divisional Income Statements with of production in endinginventories

Patti Maxine LaVerneRevenues $6,000,000 $6,000,000 $6,000,000Cost of sales:

Variable costs -0- $4,000,000 $6,400,000Fixed costs $4,800,000 $1,800,000 -0-

Ending inventories:Variable costs (-0-) ($1,000,000) ($1,600,000)Fixed costs ($1,200,000) ($450,000) -0-

Cost of sales $3,600,000 $4,350,000 $4,800,000

Operating income $2,400,000 $1,650,000 $1,200,000


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Handout 14 (b):Variable and absorption

costing, earnings management


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Handout 14(b): Variable and absorption costing; earnings managementTentative Products Company has prepared the following preliminary budgetedincome statement for the coming year:

Tentative Products Co.Budgeted Income Statement

Revenues (100,000 units @ $12.00) $1,200,000Cost of sales:Beginning inventory None

Variable manufacturing costs(120,000 units @ $4.00) $480,000Fixed manufacturing costs $600,000Ending inventory:Variable cost (20,000 units @ $4.00)Fixed cost (20,000 units @ $5.00)

($ 80,000)($100,000)

Cost of sales ($900,000)Selling and administrative expenses(all fixed) ($200,000)Operating income $100,000

TentativeProductsCo


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Revenues (100,000 units @ $12.00) $1,200,000Cost of sales:Beginning inventory NoneVariable manufacturing costs

(120,000 units @ $4.00) $480,000Fixed manufacturing costs $600,000Ending inventory:Variable cost (20,000 units @ $4.00)Fixed cost (20,000 units @ $5.00)

($ 80,000)($100,000)

Cost of sales ($900,000)

Selling and administrative expenses(all fixed) ($200,000)Operating income $100,000

Required:(a) The budgeted income statement shown above assumes that one-sixth of the coming

years production will be used to increase inventories. What would be the budgetedoperating income if the firm used variable costing in order to value its inventories?

Tentative Products Co.BudgetedIncomeStatement


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Budgeted Income StatementRevenues (100,000 units @ $12.00) $1,200,000Cost of sales:Beginning inventory NoneVariable manufacturing costs(120,000 units @ $4.00) $480,000Fixed manufacturing costs $600,000

Ending inventory:Variable cost (20,000 units @ $4.00)Fixed cost (20,000 units @ $5.00)

($ 80,000)($100,000)


Required:(a) The budgeted income statement shown above assumes that one-sixth of the coming

years production will be used to increase inventories. What would be the budgeted

operating income if the firm used variable costing in order to value its inventories?

Using variable costing, the ending inventory would be valued at solely variable

production costs, and the entire amount of fixed costs would be written off as a

period expense. Consequently, the income would be lower by $100,000, and be

equal to zero.



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gRevenues (100,000 units @ $12.00) $1,200,000Cost of sales:Beginning inventory NoneVariable manufacturing costs(120,000 units @ $4.00) $480,000Fixed manufacturing costs $600,000Ending inventory:Variable cost (20,000 units @ $4.00)Fixed cost (20,000 units @ $5.00)

($ 80,000)($100,000)


(b) What would be the dollar amount of budgeted cost of goods sold if the firm used

absorption costing and decided to maintain no ending inventory? What would be

the budgeted operating income in that case?

The budgeted cost of goods sold would be $1,000,000 ($400,000 variable and

$600,000 fixed costs). If the firm maintains no inventories, then variable costing

and absorption costing incomes are the same. In the above case, income would

be zero.


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(c) Assume that the management of Tentative Products wishes to report

absorption cost based operating income of $120,000 in the coming

year, but is unable to increase revenues or to change the firms cost

structure. Consequently, management has decided to increase

production and further increase its inventories in order to achieve the

target amount of operating income. What level of production isnecessary in order to achieve the income objective? At that level of

production, what will be the amount of fixed manufacturing cost per

unit produced? What total amount of fixed manufacturing cost will be

included in the valuation of the ending inventory?

TentativeProductsCo.

Tentative Products Co.BudgetedIncomeStatement


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Revenues (100,000 units @ $12.00) $1,200,000Cost of sales:Beginning inventory NoneVariable manufacturing costs(120,000 units @ $4.00) $480,000Fixed manufacturing costs $600,000Ending inventory:

Variable cost (20,000 units @ $4.00)Fixed cost (20,000 units @ $5.00)

($ 80,000)($100,000)


To achieve its profit target, management needs to capitalize $120,000 offixed cost in the ending inventory. This represents 1/5 of total fixed cost

($120,000 / $600,000 = 1/5). The budgeted 100,000 units to be sold must be

4/5 of the total units produced, so total production must be 125,000 units

(125,000 x 4/5 = 100,000).At a production level of 125,000 units, the fixed cost per unit is $4.80

($600,000 / 125,000 units = $4.80). The ending inventory of 25,000 units will

be assigned total fixed costs of $120,000 (25,000 x $4.80 = $120,000).

Budgeted Income StatementRevenues (100,000 units @ $12.00) $1,200,000Cost of sales:Beginning inventory NoneVariable manufacturing costs(125,000 units @ $4.00) $500,000Fixed manufacturing costs $600,000Ending inventory:Variable cost (25,000 units @ $4.00)Fixed cost (25,000 units @ $4.80)

($100,000)($120,000)



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Handout 14 (c):Variable and absorption

costing, varying production levels


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Part A: Cyclical Company has budgeted the following levels of production and sale over the nextfiscal year. The firm has no items in inventory at the start of the year. Total factory fixed costs are

budgeted at $2,400,000 in each quarter.

Quarter

Units

produced Units sold

Units in the

ending inventory

Unit fixed

cost

Total fixed

cost, ending

inventory1 120,000 100,000 ? ? ?2 120,000 110,000 ? ? ?3 120,000 120,000 ? ? ?4 120,000 130,000 ? ? ?

Required:

(a) Fill in the missing information in the above table.

(b) Determine the change in the total amount of fixed costs in the inventory over each of thefour quarters.

(c) Determine the difference between variable costing and absorption costing profits in each

period.

( ) Fill i th i i i f ti i th b t bl


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Q t

Units

produced

Units

sold

Units in

the ending

inventory

Unit

fixed

cost

Fixed

cost,

ending

inventory

Change in

inventory

fixed cost

OI.

VC vs

ABS1 120,000 100,000 20,000 $20 $400,000 +$400,000 AC>VC2 120,000 110,000 30,000 $20 $600,000 +$200,000 AC>VC3 120,000 120,000 30,000 $20 $600,000 -0- -0-4 120,000 130,000 20,000 $20 $400,000 -$200,000 AC


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Part B:

Quarter Unitsproduced Units sold Units in theending inventory Unit fixedcost

Total fixed

cost, endinginventory1 120,000 100,000 ? ? ?2 150,000 110,000 ? ? ?3 100,000 120,000 ? ? ?4 120,000 130,000 ? ? ?

Required:(1) Assume that the firm uses FIFO inventory costing, and complete the information

in the table above. (Hint: under FIFO, the units in the ending inventory areassumed to be the units most recently produced.)


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Part B:

Quarter

Units

produced Units sold

Units in the

ending inventory

Unit fixed

cost

Total fixed

cost, ending

inventory1 120,000 100,000 ? ? ?2 150,000 110,000 ? ? ?3 100,000 120,000 ? ? ?4 120,000 130,000 ? ? ?

Required:(1) Assume that the firm uses FIFO inventory costing, and complete the information

in the table above. (Hint: under FIFO, the units in the ending inventory areassumed to be the units most recently produced.)

Qt

Units

produced Unitssold Units inthe ending

inventory

Unitfixed

cost

FIFO

fixed

cost,ending

inventory

FIFO

Change ininventory

fixed cost

OI,VC vs

ABS1 120,000 100,000 20,000 $20 $400,000 +$400,000 AC>VC2 150,000 110,000 60,000 $16 $960,000 +$560,000 AC>VC3 100,000 120,000 40,000 $24 $960,000 -0- -0-

4 120,000 130,000 30,000 $20 $600,000 -$360,000 AC


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(1) Assume instead that the firm uses LIFO costing, and complete theinformation in the table above. (Hint: under LIFO, the units in the endinginventory are the oldest layers of production available to the firm. For

example, if the number of units increases during the period, the LIFO

inventory consists of the units in the beginning inventory plus additionalunits produced in the current period.)

(1) Assume instead that the firm uses LIFO costing and complete the


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(1) Assume instead that the firm uses LIFO costing, and complete theinformation in the table above. (Hint: under LIFO, the units in the endinginventory are the oldest layers of production available to the firm. For

example, if the number of units increases during the period, the LIFO

inventory consists of the units in the beginning inventory plus additionalunits produced in the current period.)

Qt

Units

produced

Units

sold

Units in

the ending

inventory

Unit

fixed

cost

LIFO fixed

cost, ending

inventory

LIFO

Changein

inventory

fixed cost

OI,

VC vs

ABS

1 120,000 100,000 20,000 $20 $400,000 +$400,000 AC>VC2 150,000 110,000 60,000 $20$16

$20x20,000+ $16x40,000= $1,040,000 +$640,000 AC>VC

3 100,000 120,000 40,000 $20$16

$20x20,000+ $16x20,000

=$720,000 -$320,000 AC


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Handout 14 (d):Variable and absorptioncosting, comprehensive

Peak Recycles Co provides the following information for the past two years:


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Peak Recycles Co. provides the following information for the past two years:

Year 1 Year 2

Beginning inventory Zero units ?

Ending inventory ? ?

Production 120 units 120 units

Sales 90 units 120 units

Sales price $35 per unit

Variable manufacturing cost $10 per unit

Fixed manufacturing cost $2,160 per year

Required:(a)Assume the firm uses variable costing, and determine the following amounts:Operating profit, Year 1 $_______________

Operating profit, Year 2 $_______________

Units in UnitFixedcost, Change in OI.r


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Qt

Units

produced

Units

sold

Units in

the ending

inventory

Unit

fixed

cost

LIFO fixed

cost, ending

inventory

LIFO

Changein

inventory

fixed cost

OI,

VC vs

ABS

1 120,000 100,000 20,000 $20 $400,000 +$400,000 AC>VC

2 150,000 110,000 60,000 $20$16

$20x20,000+ $16x40,000= $1,040,000 +$640,000 AC>VC

3 100,000 120,000 40,000 $20$16

$20x20,000+ $16x20,000

=$720,000 -$320,000 ACVC3 100,000 120,000 40,000 $24 $960,000 -0- -0-4 120,000 130,000 30,000 $20 $600,000 -$360,000 ACVC2 120,000 110,000 30,000 $20 $600,000 +$200,000 AC>VC3 120,000 120,000 30,000 $20 $600,000 -0- -0-

4 120,000 130,000 20,000 $20 $400,000 -$200,000 AC


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Year 1 Year 2


Ending inventory 30 units 30 units






Required:(a)Assume the firm uses variable costing, and determine the following amounts:

Operating profit, Year 1 $_____$ 90_______OI = ($3510) x 90u - $2,160 = $90

Operating profit, Year 2 $_____$ 840_______

OI = ($3510) x 120u - $2,160 = $840

(a)Assume the firm uses variable costing and determine the following amounts:


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(a)Assume the firm uses variable costing, and determine the following amounts:Operating profit, Year 1 $_______________


(b)Assume that the firm uses absorption costing, and determine the fixedmanufacturing costs per unitin the first year:

$____________per unit

(b)Assume that the firm uses absorption costing, and determine the total amountof fixed manufacturing costs assigned to the ending inventories:

At the end of year 1: $_______________

At the end of year 2: $_______________

(c) Assume that the firm uses absorption costing, and determine the followingamounts:



Year 1 Year 2

B i i i t Z it ?


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(b)Assume that the firm uses absorption costing, and determine the fixedmanufacturing costs per unitin the first year:

$2,160 / 120u = $18 $____$ 18_____per unit

(c) Assume that the firm uses absorption costing, and determine the total amountof fixed manufacturing costs assigned to the ending inventories:

At the end of year 1: $____$ 540______

30 x $18 = $540At the end of year 2: $_____$ 540______

30 x $18 = $540


Ending inventory 30 units 30 units






(d) Assume that the firm uses absorption costing, and determine the following amounts:

Absorption profit equals variable costing profit plus increase in inventory

fixed costs.

Operating profit, Year 1 $____$ 630_______

$ 90 + $540 = $630

Operating profit, Year 2 $____$ 840_______$ 840 + 0 = $ 840

(d) Assume that the firm has reduced its production level in the secondt 100 it D t i th t t l t f fi d f t i


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year to 100 units. Determine the total amount of fixed manufacturingcosts assigned to the ending inventories in year two under each of thefollowing inventory flow assumptions:

First, determine the per unit fixed costs in each year:

Year 1: UFC = $ 2160 / 120u = $ 18/u

Year 2: UFC = $ 2160 / 100u = $ 21.60/u

LIFO (last in, first out) $_____180______Under LIFO the ten units in inventory are assumed to be from year 1

production; 10u x $ 18 = $ 180.

FIFO (first in, first out): $_____216_______

Under FIFO the ten units in inventory are assumed to be from year 2

production; 10u x $ 21.60 = $ 216.


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Handout 14(e):

Variable costing; short-answerquestions


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1. Fleet Corporation produces a single product. The companymanufactured 700 units last year. The ending inventory consisted of

100 units. There was no beginning inventory. Variablemanufacturing costs were $6.00 per unit and fixed manufacturingcosts were $2.00 per unit. What would be the change in the dollaramount of ending inventory if variable costing was used instead of

absorption costing?A. $800 decreaseB. $200 decreaseC. $0D. $200 increase


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1. Fleet Corporation produces a single product. The companymanufactured 700 units last year. The ending inventory consisted of

100 units. There was no beginning inventory. Variablemanufacturing costs were $6.00 per unit and fixed manufacturingcosts were $2.00 per unit. What would be the change in the dollaramount of ending inventory if variable costing was used instead of

absorption costing?A. $800 decreaseB. $200 decreaseC. $0D. $200 increase

The 100 units would be valued at

$600 variable cost instead of at

$800 absorption cost.


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2. Swifton Company produces a single product. Last year,

the company had net operating income of $40,000 usingvariable costing. Beginning and ending inventories were22,000 and 27,000 units, respectively. If the fixedmanufacturing overhead cost was $3.00 per unit, what was

the income using absorption costing?A. $15,000B. $25,000C. $40,000

D. $55,000


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2. Swifton Company produces a single product. Last year,

the company had net operating income of $40,000 usingvariable costing. Beginning and ending inventories were22,000 and 27,000 units, respectively. If the fixedmanufacturing overhead cost was $3.00 per unit, what was

the income using absorption costing?A. $15,000B. $25,000C. $40,000

D. $55,000

The fixed costs in inventory increase by

$15,000 (5,000 units x $3), so the incomeincreases to $55,000 ($40,000 + 15,000).


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3. Blake Company produces a single product. Last year,

Blake's net operating income under absorption costingwas $3,600 lower than under variable costing. Thecompany sold 10,000 units during the year, and itsvariable costs were $9 per unit, of which $1 was

variable selling expense. If production cost was $11 perunit under absorption costing, then how many units didthe company produce during the year?A. 8,200 units

B. 8,800 unitsC. 11,200 unitsD. 11,800 units


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3. Blake Company produces a single product. Last year,

Blake's net operating income under absorption costingwas $3,600 lower than under variable costing. Thecompany sold 10,000 units during the year, and itsvariable costs were $9 per unit, of which $1 was

variable selling expense. If production cost was $11 perunit under absorption costing, then how many units didthe company produce during the year?A. 8,200 units

B. 8,800 unitsC. 11,200 unitsD. 11,800 units

The fixed cost per unit is $3 ($11 - $8), soproduction is lower than sales by 1,200 units.

Production is 8,800 units (10,0001,200).


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4. Bellue Inc. manufactures a variety of products.

Variable costing net operating income was $96,300last year and ending inventory decreased by 2,600units. Fixed manufacturing overhead cost was $1 perunit. What was the absorption costing net operating

income last year?A. $2,600B. $93,700

C. $96,300D. $98,900


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4. Bellue Inc. manufactures a variety of products.

Variable costing net operating income was $96,300last year and ending inventory decreased by 2,600units. Fixed manufacturing overhead cost was $1 perunit. What was the absorption costing net operating

income last year?A. $2,600B. $93,700

C. $96,300D. $98,900

Absorption costing income is lower than

variable costing income by the $2,600 decrease

in inventory fixed cost.

$96,300 - $2,600 = $93,700.

Ch 14 Var vs Abs Costing

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Transcript of Ch 14 Var vs Abs Costing