Question

Langdon Company produced 8,600 units during the past year, but only 8,500 of the units were sold. The following additional information is also available.

Direct materials used		$88,100
Direct labor incurred		$28,000
Variable manufacturing overhead		$21,500
Fixed manufacturing overhead		$34,400
Fixed selling and administrative expenses		$69,500
Variable selling and administrative expenses		$12,000

There was no work in process inventory at the beginning and end of the year, nor did Langdon have any beginning finished goods inventory.

Finished Goods Inventory Cost- $1,600

Which costing method, absorption or variable costing, would show a higher net income for the year? By what amount? (Round intermediate calculations to 2 decimal places e.g. 10.25 and final answer to 0 decimal places, e.g. 2,510.)

Answer 1

Absorption costing would show higher net income for the year. It happens because in the absorption costing method, ending inventory will contain a portion of fixed manufacturing overhead. Thus, ending inventory in absorption costing will be higher in comparison to ending inventory valued in variable costing by the fixed manufacturing overhead element.

Fixed manufacturing overhead element included in ending inventory as per absorption costing = 34,400 x 100/8,600

= $400

Higher ending inventory reduces cost of goods sold and thus net income increases.

Thus, in absorption costing, net income will be higher by $400

kindly give a positive rating if you are satisfied with the solution. Please ask if you have any query related to the question, Thanks.