Question

Which of the following situations would cause variable costing net income to be higher than absorption costing net income? Units produced and sold were equal, units produced exceeded units sold, units sold exceeded units produced, or units sold were less than units produced

Answer 1

• The correct answer is Option 3^rd: When Units sold exceeded units produced.
• When units sold exceed Unit produced, the Net Income under Variable costing will e higher. This is illustrated through following example:
• First, when units produced are more than units sold

Sale Price	$              40.00
Fixed Overhead	$ 1,00,000.00
Units produced	10000
Units Sold	8000
Fixed cost per unit	$              10.00 [100000/10000units]
Variable cost	$              10.00
Total cost of manufacturing per unit	$              20.00 [10 + 10]

Traditional Absorption Costing
Sales	$ 3,20,000.00
(-) Cost of Goods Sold	$ 1,60,000.00
Gp/ Net Income	$ 1,60,000.00

Variable Costing
Sales	$         3,20,000.00
(-) Variable cost	$            80,000.00
Contribution margin	$         2,40,000.00
(-) Fixed cost	$         1,00,000.00
Net Income	$         1,40,000.00

---When units produced are more than units sold, the net income under Variable cost will be LOWER.

• Second, when units sold are MORE than units produced:

Sale Price	$              40.00
Fixed Overhead	$ 1,00,000.00
Units produced	8000
Units Sold	10000
Fixed cost per unit	$              12.50 [100000/8000 units]
Variable cost	$              10.00
Total cost of manufacturing per unit	$              22.50 [12.5+ 10]

Traditional Absorption Costing
Sales	$ 4,00,000.00
(-) Cost of Goods Sold	$ 2,25,000.00
Gp/ Net Income	$ 1,75,000.00
Variable Costing
Sales	$ 4,00,000.00
(-) Variable cost	$ 1,00,000.00
Contribution margin	$ 3,00,000.00
(-) Fixed cost	$ 1,00,000.00
Net Income	$ 2,00,000.00

--- Net Income under Variable costing increases (or is MORE) when units sold exceeded units produced.