Question

Landow Company uses variable costing for internal purposes and wants to restate income to that of absorption costing for external reporting purposes. Landow's income under variable costing is $630,000. Fixed production cost in ending inventory is $120,000 and $85,000 in beginning inventory. What is Landow's income under absorption costing?

Answer 1

To determine Landow's income under absorption costing, add the fixed production costs in the ending inventory to the variable costing income, and then subtract the fixed production costs in the beginning inventory. The income under absorption costs $665,000.

Step-by-step explanation:

The question is about the difference in reporting income between variable costing and absorption costing. To adjust Landow Company's income from variable costing to absorption costing, we need to account for the fixed production costs in the beginning and ending inventories. Since absorption costing includes both variable and fixed manufacturing costs in the cost of goods sold, we should adjust the variable costing income by the change in fixed production costs that are in inventory.

Here's the step-by-step calculation:

1. Add the fixed production costs in the ending inventory to the income under variable costing: $630,000 + $120,000 = $750,000.
2. Subtract the fixed production costs in the beginning inventory from the result in step 1: $750,000 minus $85,000 = $665,000.

Therefore, Landow's income under absorption costs is $665,000.