Question

Stiller Corporation incurred fixed manufacturing costs of $24,000 during 2015. Other information for 2015 includes: The budgeted denominator level is 2,000 units. Units produced total 1,500 units. Units sold total 1,200 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.

Answer 1

Operating profit using absorption costing will be higher by $3,600 than operating income if using variable costing.

Step-by-step explanation:

The difference between profit under variable costing and under absorption costing is simply the value of the change in inventory.

Usually, a decrease in inventory would cause profit under absorption costing to be lower . This is so because cost of goods sold would become higher leading to a lower profit . And vice versa

Difference in profit = POAR × change inventory

Predetermined Overhead absorption rate(POAR)

= Estimated overhead/ estimated production unit

= $24,000/2,000 units = $12 per unit

Change in inventory = 1500 - 1200= 300 units

Difference in profit = 300 × $12 per unit = $3,600

Operating profit using absorption costing will be higher by $3,600 than operating income if using variable costing.