Q21-18E - Horngren'S Financial And Managerial Accounting

Question

Comparing variable and absorption costing Refer to Exercises E21-16 and E21-17. 

Requirements: 

1. Which costing method produces the highest operating income? Explain why. 
2. Which costing method produces the highest April 30 balance in Finished Goods Inventory? Explain why

 

Step-by-Step Solution

Answer

Answer

 

1. Absorption method
2. Absorption method

 

Step 1: Income statement using absorption costing

The absorption method produces the highest operating income because under the absorption method fixed manufacturing cost is charged only for the number of units sold.

Step 2: Difference between April 30 balance as per absorption and variable costing

April 30 balance in Finished Goods Inventory under absorption method is higher than variable costing because absorption costing includes fixed manufacturing overhead in total unit product cost.