Question

Garfield Company has the following information for the current year: Beginning fixed manufacturing overhead in inventory $240,000 Fixed manufacturing overhead in production 900,000 Ending fixed manufacturing overhead in inventory 50,000 Beginning variable manufacturing overhead in inventory $25,000 Variable manufacturing overhead in production 120,000 Ending variable manufacturing overhead in inventory 30,000 What is the difference between operating incomes under absorption costing and variable costing

Answer 1

The variable costing method will provide a net income $190,000 higher than the absorption costing.

Step-by-step explanation:

Giving the following information:

Beginning fixed manufacturing overhead in inventory $240,000

Fixed manufacturing overhead in production 900,000

Ending fixed manufacturing overhead in inventory 50,000

The difference between the absorption costing and variable costing is the treatment of the fixed manufacturing costs.

For absorption costing fixed manufacturing overhead is a product cost, therefore it is present in the ending inventory.

Absorption costing:

Fixed manufacturing cost= Beginning fixed manufacturing overhead + Fixed manufacturing overhead in production - Ending fixed manufacturing overhead in inventory

Fixed manufacturing cost= 240,000 + 900,000 - 50,000

Fixed manufacturing cost= $1,090,000

Variable costing:

Fixed manufacturing cost= $900,000

The variable costing method will provide a net income $190,000 higher than the absorption costing.