Question

Manta Ray Company manufactures diving masks with a variable cost of $30. The masks sell for $39. Budgeted fixed manufacturing overhead for the most recent year was $696,000. Actual production was equal to planned production.

Required:
State whether operating income is higher under variable or absorption costing and the amount of the difference in reported operating income under the two methods. Treat each condition as an independent case. (Do not round intermediate calculations.)

1.	Production	92,800	units
	Sales	91,300	units
2.	Production	80,000	units
	Sales	86,100	units
3.	Production	81,000	units
	Sales	81,000	units

Answer 1

The only difference between variable costing and absorption costing is that fixed manufacturing overheads are absorbed as product cost under absorption costing while they are charged as period costs under variable costing

Operating Income will be higher under variable costing if units sold are higher than units produced and it will be higher under absorption costing is units sold are lower than units produced

1.Absorption costing income will be higher

Difference = Fixed manufacturing Overhead*Difference in units/Units Produced

= 696000*1500/92800

= 11,250

2.Variable costing income will be higher

Difference = 696000*6100/80,000

= $53,070

3.Equal income under both

Difference = $0