Question

In: Accounting

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.

Solutions

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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