Question

High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant's operation: Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for May.
(c) Explain the reason for any difference in the ending inventory balances under the two costing methods and the impact of this difference on reported net operating income.

Answer 1

The difference in the ending inventory relates to a difference in the handling of fixed manufacturing overhead costs.

Under variable costing, these costs have been expensed in full as period costs.

Under absorption costing, these costs have been added to units of a product at the rate of $10 per unit ($100,000/10,000 units produced = $10 per unit).

Thus, under absorption costing a portion of the $100,000 fixed manufacturing overhead cost for the month has been added to the inventory account rather than expensed on the income statement:

Added to the ending inventory:

(2,000 units x $10 per unit)                                                $ 20,000

Expensed as part of the cost of goods sold:

(8,000 units $10 per unit)                                                   $ 80,000

Total fixed manufacturing overhead cost for the month:    $100,000

Because $20,000 of fixed manufacturing overhead cost has been deferred in inventory under absorption costing, the net operating income reported under that costing method is $20,000 higher than the net operating income under variable costing(refer to the first image)

And for question refer to the second image.

Hence, The difference in the ending inventory relates to a difference in the handling of fixed manufacturing overhead costs.

Learn more about absorption costing:

brainly.com/question/22079536

#SPJ4