Question

The level of inventory of a manufactured product has increased by 8,319 units during a period....

The level of inventory of a manufactured product has increased by 8,319 units during a period. The following data are also available:

Variable Fixed
Unit manufacturing costs of the period $13 $8
Unit operating expenses of the period $2 $3

What would be the effect on income from operations if variable costing is used rather than absorption costing?

a.$91,509 decrease

b.$66,552 increase

c.$66,552 decrease

d.$91,509 increase

Business   Accounting   
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Answer #1
As the ending inventory has been increased, the fixed mfg cost shall be deferred in the ending inventory in Absorption costing.
Therefore, the net income under variable costing will be decreased as compared to absorption costing by the amount of fixed mfg cost deferred in ending inventory units increased.
Thus,
Net Income decrease in Variable costing:
Increased units of ending inventory 8319
Multiply: Fixed Mgh cost per unit 8
Fixed Mfg cost deferred resultin in decrease in Income under VC 66552
Answer is c. $ 66,552 decrease
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