Question

1) An increase in inventory will result in _____ net operating income when using absorption costing as opposed to variable costing.

	A.	higher
	B.	equal
	C.	lower

2)

A manufacturing company uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs:

Costs:
Wages and salaries	$400,000
Depreciation	40,000
Occupancy	120,000
Total	$560,000

The distribution of resource consumption across the three activity cost pools is given below:

	Activity Cost Pools
		Order
	Fabricating	Processing	Other	Total
Wages and salaries	80%	15%	5%	100%
Depreciation	70%	25%	5%	100%
Occupancy	40%	50%	10%	100%

How much cost, in total, would be allocated in the first-stage allocation to the Order Processing cost pool?

	A.	$186,667
	B.	$280,000
	C.	$130,000
	D.	$84,000

Answer 1

1) When company's ending inventory increases then net operating income under absorption costing would be higher than net operating income from variable costing because of Fixed manufacturing overhead

An increase in inventory will result in _____ net operating income when using absorption costing as opposed to variable costing.

So answer is a) Higher

2) Calculate total cost allocated to order processing cost

	Order processing
Wages and salaries	400000*15% = 60000
Depreciation	40000*25% = 10000
Occupancy	120000*50% = 60000
Total	130000

So answer is c) $130000