Crossbow Corp. produces a single product. Data concerning June\'s operations fol

Question

Crossbow Corp. produces a single product. Data concerning June's operations follow: Units in beginning inventory 0 Units produced 6,000 Units sold 5,000 Variable costs per unit: Manufacturing $ 7 Selling and administrative $ 3 Fixed costs in total: Manufacturing $12,000 Selling and administrative $ 3,000 For the year in question, net operating income under variable costing will be: higher than net operating income under absorption costing. lower than net operating income under absorption costing. the same as net operating income under absorption costing. The relation between absorption costing and variable costing net operating income cannot be determined.

Explanation / Answer

Income statement (Under Absorption costing)

Income statement (Under Variable costing)

Since the total cost is lower in Absorption costing, Hence net operating income will be higher in Absorption costing.

Hence correct option is (b) i.e. operating income will be lower in Variable costing as compared to Absorption costing.

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Sales - Production costs: Variable manufacturing cost (6,000 x 7) 42,000 Fixed manufacturing overheads 12,000 Cost of goods produced 54,000 Add: Opening stock of finished goods 0 Less: Closing stock of finished goods (54,000/6,000) x 1,000 - 9,000 Cost of goods sold 45,000 Add: Fixed selling and administrative expenses 3,000 Variable selling and administrative expenses (5,000 x 3) 15,000 Total cost 63,000

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