Question

Bellue Inc. manufactures a single product. Variable costing net operating income was $103,000 last year and its inventory decreased by 2,300 units. Fixed manufacturing overhead cost was $4 per unit for both units in beginning and in ending inventory. What was the absorption costing net operating income last year?

Answer 1

Reconciliation of Variable Costing and Absorption Net Operating Income:

	Amount
Net Operating Income as per Variable Costing	$       1,03,000
Less: Fixed manufacturing overhead released from Inventory (2300*$4)	$           -9,200
Net Operating Income as per Absorption costing	$           93,800

Thus, Net operating income in absorption costing is $ 93,800

Difference in Net operating Income under Variable costing method & Absorption costing method is due to treatment of Fixed manufacturing overheead.

Difference can be reconcile using following :

Criteria	Operaing Income higher in
Ending Inventory is more than beginning Inventory	Absoption costing
Ending Inventory is less than beginning Inventory	Variable costing

In this case,

Inventory decreased by 2,300 units; that means Ending inventory is less than Beginning Inventory, Thus, Net operating income higher in Variable costing.

Therefore we need to deduct fixed maufacturing overhead from operating income of Variable costing i.e (2,300*$4) in order to get net operating income as per absorption costing.