Question

The level of inventory of a manufactured product has increased by 6,816 units during a period. The following data are also available:
Variable Fixed
Unit manufacturing costs of the period $12.00 $5.00
Unit operating expenses of the period 4.00 3.00

What would the effect on income from operations if absorption costing is used rather than variable costing?

Answer 1

Answer:

Income from Absorption Costing will Increase by $34,080

Explanation:

Absorption Costing Include in Product Cost the Fixed Cost of Manufacturing whilst Variable Costing treats Fixed Manufacturing Costs as a Period cost expensed in the Profit and Loss account.

Differences in Income between Absorption Costing Income and Variable Costing Income arise due to existence of Inventory. This is because fixed manufacturing costs in Absorption costing is deferred in Inventory.

Income from Absorption Costing will Increase if level of inventory of a manufactured product has increased by 6,816 units during a period.

Increase Amount is :

6,816 units × $5.00 = $34,080