Question

Crossbow Corp. produces a single product. Data concerning June's operations follow: Units in beginning inventory 0 Units produced 6,000 Units sold 5,000 Variable costs per unit: Manufacturing $ 7 Selling and administrative $ 3 Fixed costs in total: Manufacturing $12,000 Selling and administrative $ 3,000 For the year in question, net operating income under variable costing will be: higher than net operating income under absorption costing. lower than net operating income under absorption costing. the same as net operating income under absorption costing. The relation between absorption costing and variable costing net operating income cannot be determined.

Answer 1

Income statement (Under Absorption costing)

Sales	-
Production costs:
Variable manufacturing cost (6,000 x 7)	42,000
Fixed manufacturing overheads	12,000
Cost of goods produced	54,000
Add: Opening stock of finished goods	0
Less: Closing stock of finished goods (54,000/6,000) x 1,000	- 9,000
Cost of goods sold	45,000
Add: Fixed selling and administrative expenses	3,000
Variable selling and administrative expenses (5,000 x 3)	15,000
Total cost	63,000

Income statement (Under Variable costing)

Sales	-
Variable manufacturing cost (6,000 x 7)	42,000
Variable cost of goods produced	42,000
Add: Opening stock of finished goods	0
Less: Closing stock of finished goods (42,000/6,000) x 1,000	- 7,000
Variable cost of goods sold	35,000
Add: Variable selling and administrative expenses (5,000 x 3)	15,000
Total variable cost	50,000
Add: Fixed manufacturing cost	12,000
Fixed selling and administrative expenses	3,000
Total cost	65,000

Since the total cost is lower in Absorption costing, Hence net operating income will be higher in Absorption costing.

Hence correct option is (b) i.e. operating income will be lower in Variable costing as compared to Absorption costing.

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