35. $31,000 36. Higher $31,000 Use the following information answer questions 35
ID: 2496431 • Letter: 3
Question
35. $31,000
36. Higher $31,000
Use the following information answer questions 35 through 36. City Lights began business in October 2012. It uses a variable costing system for internal reporting and an absorption costing system for external reporting. Information about its first two months of operations follows October 1,500 1,000 $188,000 73,000 November 800 1,100 Units produced Units sold Revenue Variable Cost of Goods Sold Variable Marketing and Administrative Expense... 14,000 Contribution Margin Fixed Manufacturing Overhead Fixed Marketing and Administrative Expense Operating Income 101,000 93,000 rative Expense1.000 ES3.0002 $206,800 80,300 15400 11,100 93,000 11.000 S7.100 City Lights uses the FIFO inventory costing method. Its selling price per unit, variable cost per unit, and total fixed costs did not change during the first two months of operations. 35. Compute the amount of fixed cost that will be included in the October ending inventory when absorption costing is used. 36. Will the operating income on City Light's October absorption costing income statement be higher, lower, or the same as the operating income on its variable costing income statement? By what amount?Explanation / Answer
35. Only fixed manufacturing cost will be included in ending inventory for October. Fixed marketing and administration expenses should be treated as period expense.
Number of units produced in October: 1500
Number of units unsold : 500
Therefore, the amount of fixed cost that would be included in the month's ending inventory is 500/1500 x 93,000
= $ 31,000.
36. The operating income for October using absorption costing would be higher by $ 31,000 as compared to that under variable costing for the simple reason that the ending inventory under the latter technique, ending inventory does not include any fixed cost, and inventory inventory has a direct bearing on the gross margin.
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