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v2.cengagenow.com 21-2018SP-Reeder-OL (Jan to May): Link to Cengage CengageNOWv2 | Online teaching and learning resource from Cengage L + The level of inventory of a manufactured product has increased by 4,000 units during a period. The following data are also available: Unit manufacturing costs of the period Unit operating expenses of the period Variable $22.00 7.00 Fixed 11.00 5.00 What would be the effect on income from operations if absorption costing is used rather than variable costing? Oa. $64,000 decrease b. $64,000 increase C. $44,000 decrease Od. $44,000 increase

Explanation / Answer

Answer

d. $44,000 increase  

Explanation :

Product Cost under variable costing = Variable unit manufacturing cost + Variable unit operating expense = $22 + $7 = $27

Product Cost under absorption costing = Variable unit manufacturing cost + Variable unit operating expense + Fixed unit manufacturing cost = $22 + $7 + $11 = $38

Impact on Net income for 4,000 units increase in inventory if absorption costing is used instead of variable costing = ($38 - $27) * 4,000 units = $44,000 increase  

Note : Since there is an increase in inventory level ,under absorption costing fixed manufacturing cost blocked in inventory value will get deffered or release in futute period . Thus as a result there is reduction in COGS in current period due to which the net operating income will increase for current period

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