Question

Galen Company income under variable costing is $1,050,000. Fixed production costs in ending inventory are $300,000 and $250,000 in beginning inventory. What is Galen Company's income under absorption costing?

Answer 1

Answer:

Income under absorption costing = $1,100,000

Explanation:

Marginal and absorption costing are two different methods to deal with fixed production overheads and and decide whether or not they are included in valuation of inventory.

Valuation of inventory

Opening and closing inventory are valued at variable cost under variable costing.  Whereas in absorption costing, opening and closing inventory are valued at full production cost (including fixed production overheads).

Reconciling profits reported under two different methods

When inventory levels increase or decrease during a period then profits will differ under absorption and marginal costing because of fixed production cost.

Net Income under absorption costing = Income under variable costing + fixed production cost in ending inventory – fixed production cost in beginning inventory

= $1,050,000 + $300,000 - $250,000

= $1,100,000