Question

Bianca Bicycle Company manufactures mountain bikes with a variable cost of $2,200. The bicycles sell for $2,950 each. Budgeted fixed manufacturing overhead for the most recent year was $12,200,000. Planned and actual production for the year were the same.

Required:

State whether income is higher under variable or absorption costing and the amount of the difference in reported opearting income under the two methods. Treat each condition as an independent case. (Round intermediate calculations to 2 decimal places.)

1.	Production	23,200	units
	Sales	27,400	units
2.	Production	13,000	units
	Sales	13,000	units
3.	Production	12,800	units
	Sales	10,400	units

Answer 1

Absorption costing net operating income will be higher than variable costing net operating income when the production is higher than sales due to fixed manufacturing overhead deferred in ending inventory.

1.	Variable costing income is higher	(12,200,000/23,200)*(23,200-27,400) = 2,208,612
2.	Same under both	0
3.	Absorption costing income is higher	(12,200,000/12,800)*(12,800-10,400) = 2,287,512

I have rounded some numbers. Comment if you face any issues