When there are no units in the beginning Finished Goods Inventory and the units produced are...

When there are no units in the beginning Finished Goods Inventory and the units produced are more than the units sold, the operating income will be higher under variable costing than absorption costing.

Expert Solution

When there are no units in the beginning Finished Goods Inventory and the units produced are more than the units sold, the operating income will be higher under absorption costing.

The same can be understood by the help of following example:

	$ Per Unit
Sale Price of the product	100
Direct Material	35
Direct Labor	15

Variable cost	5
Fixed Cost	5

During the month there was no beginning inventory
Units produced	9000
Units Sold	7500
Closing inventory	1500

Operating Income Statement under Absorption Costing


Sales (7500 * 100)		7,50,000

Cost of Goods Sold

Beginning Inventory	-
Add : Cost of Production (9000*60)	5,40,000

Less: Ending Inventory (1500 * 60)	90,000	4,50,000

Gross Profit		3,00,000

Administrative Expenses		-

Net Operating Income		3,00,000


Operating Income Statement under Variable Costing


Sales (7500 * 100)		7,50,000

Cost of Goods Sold

Beginning Inventory	-
Add : Cost of Production (9000*55)	4,95,000

Less: Ending Inventory (1500 * 55)	82,500	4,12,500

Gross Profit		3,37,500

Less: Fixed Cost		45000
Administrative Expenses		-

Net Operating Income		2,92,500

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ekkarill92 answered 1 year ago

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