Question

Routsong Company had the above sales and production data for the past four years:

                                    Year 1   Year 2   Year 3   Year 4

Production in units---- 6,000    9,000    4,000    5,000

Sales in units ---------- 6,000    6,000     5,000    7,000

Selling price per unit, variable cost per unit, and total fixed cost are the same in each year. Which of the following statements is not correct?

	a.	Under variable costing, net operating income for Year 1 and Year 2 would be the same.
	b.	Because of the changes in production levels, under variable costing the unit product cost will change each year.
	c.	The total net operating income for all four years combined would be the same under variable and absorption costing.
	d.	Under absorption costing, net operating income in Year 4 would be less than the net operating income in Year 2.

Answer 1

Under absorption costing, net operating income in Year 4 would be less than the net operating income in Year 2. is incorrect statement. Income wuold be higher in year 4 as no of units sold is higher in year 4

Rest of the statements are true as explained below:

Under variable costing, net operating income for Year 1 and Year 2 would be the same. - True since no of units sold is same

Because of the changes in production levels, under variable costing the unit product cost will change each year. - True since full fixed cost is charged in same year irrespective of no of units produced and sold

The total net operating income for all four years combined would be the same under variable and absorption costing.- True since total units sold and total units produced in 4 years is same i.e. 24000