Question

Assume the following information for a company that produced 10,000 units and sold 9,000 units during its first year of operations:

	Per Unit					Per Year
Selling price		$	200
Direct materials		$	80
Direct labor		$	50
Variable manufacturing overhead		$	10
Sales commission		$	8
Fixed manufacturing overhead						$	295,000

Which of the following choices explains the relationship between the absorption costing net operating income and the variable costing net operating income?

Multiple Choice

• The absorption costing net operating income will be lower than the variable costing net operating income by $29,500.

• The absorption costing net operating income will be lower than the variable costing net operating income by $101,500.

• The absorption costing net operating income will be higher than the variable costing net operating income by $29,500.

• The absorption costing net operating income will be higher than the variable costing net operating income by $101,500.

Answer 1

As the production is higher than sales, variable costing operating income will be lower than absorption costing operating income because the fixed manufacturing overhead is treated as period cost under variable costing and would have been expensed completely.

Difference = Ending inventory * Fixed manufacturing overhead per unit

= (10,000-9,000) * (295,000/10,000)

= 29,500

.

Option C is the answer

(The absorption costing net operating income will be higher than the variable costing net operating income by $29,500.)