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

Answer 1

Option (A) is correct.

Step-by-step explanation:

Budgeted O/H cost = 28,000

Overhead Rate = Budgeted Overhead ÷ Budgeted units

= 28,000 ÷ 2,800

= 10

In Variable costing, the cost of all 1,500 units produced are considered.

But in case of Absorption costing, only the cost of 1200 units are considered i.e the amount of units sold are included.

Due to 300 units, the cost in Variable costing is higher which is shown as follows:

= 300 × 10

= 3,000

Therefore, operating income using absorption costing will be $3,000 Higher than operating income if using variable costing .