Question

A company's operating income was $70,000 using variable costing for a given period. Beginning and ending inventories for that period were 45,000 units and 50,000 units, respectively. Ignoring income taxes, if the fixed factory overhead application rate was $8.00 per unit, what would operating income have been using full costing?

Answer 1

Answer:

Operating Income Using Full Costing                          $

Operating income based on marginal costing          70,000

Add: Difference in inventory valuation (5,000 x $8)  40,000

Operating income based on absorption costing        110,000

Explanation:

In this case, we need to calculate difference between closing inventory and opening inventory (50,000 - 45,000= 5,000 units). The difference in inventory is valued at fixed factory overhead application rate of $8. The value of difference in inventory is added to the operating income reported by marginal costing.