Question

At EOM Inc., the beginning inventory is 20,000 units. All of the units manufactured during the period and 16,000 units of the beginning inventory were sold. The beginning inventory fixed costs are $50 per unit, and variable costs are $300 per unit.

a. Determine whether variable costing income from operations is less than or greater than absorption costing income from operations.

b. Determine the difference in variable costing and absorption income from operations. $

Answer 1

Req a: As the inventory level has been reduced i.e. beginning an inventory of 16000 units has been sold and remain with just 4000 units as compared to previous inventory level. Therefore, the income under Variable costing will be greater than absorption costing. This is due to the fact that the fixed cost which has been deferred last year will be released on the sale of inventory. Hence, The income under Variable costing is greater than absorption costing.

Req b: The difference in income of both the costing is as follows:

Decrease in inventory level by (20,000-4,000): 16,000 units

Fixed manufacturing cost per unit: $ 50 per unit

Therefore, the profit under Variable costing greater by: $800,000 (i.e. 16000units@50)