Question

Michigan Industries has the following costs for the year just ended: Beginning variable manufacturing overhead in inventory $ 35,500 Beginning fixed manufacturing overhead in inventory 66,500 Ending variable manufacturing overhead in inventory $ 15,550 Ending fixed manufacturing overhead in inventory 48,250 Fixed selling and administrative costs $ 737,000 Units produced 5,200 units Units sold 4,950 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 how fixed manufacturing overhead costs are treated. Absorption costing allocates these costs to units produced, while variable costing treats them as period costs. This leads to different operating income calculations.

Step-by-step explanation:

The difference between operating incomes under absorption costing and variable costing can be determined by examining the treatment of fixed manufacturing overhead costs. Absorption costing allocates fixed manufacturing overhead costs to units produced, while variable costing treats fixed manufacturing overhead costs as period costs and does not allocate them to units produced. The difference in operating incomes occurs because absorption costing charges a portion of fixed manufacturing overhead costs to units produced and held in inventory, whereas variable costing treats all fixed manufacturing overhead costs as an expense incurred in the period in which they are incurred.