Question

21. Finlandia Frankfurters (FF), incorporated in Finland, uses variable costing for external reporting. On 1st January, it is purchased by Belgian Bagels, which uses absorption costing, and FF is obliged to adopt the parent company's accounting method for the purposes of filing consolidated accounts. At the time of the merger, FF had 4,000 units in inventory and production costs remained stable over the following year. Which is true about FF's income in the first post-merger year? A. If sales are 10,000 units and production 12,000 units, variable costing income (VCI) exceeds full costing income (FCI) B. If sales are 10,000 units and production 10,000 units, FCI exceeds VCI C. If sales are 10,000 units and production 8,000 units, VCI exceeds FCI D. If sales are 12,000 units and production 10,000 units, FCI exceeds VCI E. Unable to determine.

Answer 1

answer : C) If sales are 10000 units and production 8000 units VCI exceeds FCI.

explanation

if the production and sales are same both the variable costing and full costing will report the same profit (because there is no ending inventory )

if there is any units unsold (ending inventory ) both methods will produce different results because of the fixed manufacturing overhead differed (released from ) in inventory.

if sales exceeds the production (we have beginning inventory) this time the variable costing income exceeds the full costing income because of fixed manufacturing overhead released from beginning inventory

if production exceeds the sales this time full costing will report higher income than the variable costing

so above .. sales 10000 units exceeds the production of 8000 units this time VCI exceeds the FCI (we will sell more than produced because we  have beginning inventory of 4000 units )