Question

PE 5-2A OBJ. 1 EE 5-2 p. 186 Variable costing-production exceeds sales Fixed manufacturing costs are $60 per unit, and variable manufacturing costs are $150 per unit. Production was 453,000 units, while sales were 426,000 units. Determine (a) whether variable costing income from operations is less than or greater than absorption costing income from operations, and (b) the difference in variable costing and absorption costing income from operations. ow t inc. fer C.M-150

Answer 1

1. Cost of goods sold - Variable costing
	$
Production cost (453,000 units * $ 150)	6,79,50,000
Less: Ending inventory (27000 units * $ 150)	40,50,000
Variable cost	6,39,00,000
Add: Fixed cost	2,71,80,000
Total cost	9,10,80,000
Cost of goods sold - Absorption costing
Production cost (453,000 units * $ 210)	9,51,30,000
Less: Ending inventory (27000 units * $ 210)	56,70,000
Total cost	8,94,60,000			16,20,000
Net operating income under absorption costing will be higher than $ 16,20,000 as cost under absorption costing in lower.
2. The differenc is because of fixed manufacturing overhead that becomes part of ending inventory under absorption costing system. The ending inventory absorbs a portion of fixed manufacturing overhead and reduces the burden of current period. Under variable costing, the fixed manufacturing overhead cost is not included in the product cost but charged to the inome statement of the relevant period in its entirety.