Question

Variable Costing—Sales Exceed Production

The beginning inventory is 8,000 units. All of the units that were manufactured during the period and 8,000 units of the beginning inventory were sold. The beginning inventory fixed manufacturing costs are $42 per unit, and variable manufacturing costs are $93 per unit.

a. Determine whether variable costing operating income is less than or greater than absorption costing operating income.

b. Determine the difference in variable costing and absorption costing operating income.
$

Answer 1

In Variable costing, even Fixed manufacturing overheads are considered as Period costs
whereas in Absorption costing Fixed manufacturing overheads are considered as Product costs.
Therefore, entire fixed manufacturing overhead incurred during a period would be expensed off in
the year in which incurred.
whereas under absorption costing, the fixed manufacturing overhead is also allocated to the number of unit produced.
Therefore, it will considered for finding the product cost of closing inventory as well.
a) In the given scenario, Fixed manufacturing overhead of 8000 units would also be treated as expenses in the
current period under absorption costing.
Therefore,
Variable costing operating income would be more in the current year
compared to Absorption costing operating Income.
b) Difference = 8000 units * $42
= $336000