Question

Montana industries has the following costs for the year just ended: beginning variable manufacturing overhead in inventory $33,500, beginning fixed manufacturing overhead in inventory $65,500, ending variable manufacturing overhead in inventory $15,350, ending fixed manufacturing overhead in inventory $47,750, fixed selling and administrative costs $735,000, units produced 5,000 units, units sold 4,750 units. What is the difference between operating incomes under absorption costing and variable costing?

Answer 1

The difference between operating incomes under absorption costing and variable costing is whether or not the fixed manufacturing overhead costs are included in the product cost.

Step-by-step explanation:

In absorption costing, both variable and fixed manufacturing overhead costs are included in the product cost. This means that the cost of each unit includes a portion of both variable and fixed manufacturing overhead costs. On the other hand, in variable costing, only the variable manufacturing overhead costs are included in the product cost. The fixed manufacturing overhead costs are treated as period expenses and are not included in the product cost.

To calculate the operating income under absorption costing, we need to allocate the fixed manufacturing overhead costs to units produced. The fixed manufacturing overhead costs in inventory (both beginning and ending) need to be allocated based on the units produced. Thus, the operating income under absorption costing takes into account both the fixed and variable manufacturing overhead costs.

To calculate the operating income under variable costing, we consider only the variable manufacturing overhead costs. The fixed manufacturing overhead costs are not allocated to units produced but are treated as period expenses. Thus, the operating income under variable costing considers only the variable manufacturing overhead costs.