Stiller Corporation incurred fixed manufacturing costs of $ 28 comma 000 during

Question

Stiller Corporation incurred fixed manufacturing costs of $ 28 comma 000 during 2015. Other information for 2015 includes: The budgeted denominator level is 2 comma 800 units. Units produced total 1 comma 500 units. Units sold total 1 comma 200 units. Beginning inventory was zero. The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. Operating income using absorption costing will be ________ than operating income if using variable costing. A. $ 3 comma 000 higher B. $ 12 comma 000 lower C. $ 5 comma 600 lower D. $ 16 comma 000 higher

Explanation / Answer

Note : Increse in ending inventory decreses the COGS & therefore operating income increases.

Fixed manufacturing cost absorption rate  = ($28,000 / 2,800 units ) = $10 per unit .

Fixed manufacturing cost inclued in closing stock =( 1,500 units - 1,200 units) * $10 = $3,000

Thus , Operating income using absorption costing will be $3,000 higher (option A.) than operating income if using variable costing.

Reason : Under absorption $3,000 of fixed cost will remain in ending inventory , whereas under variable costing lump sum amout of fixed cost charged. Therefore value of ending inventory under absorption costing is $3,000 more than vriable costing.

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