Question

Ming Company had net income of exist767, 200 based on variable costing. Beginning and ending inventories were 7, 300 units and 4, 700 units, respectively. Assume the fixed overhead per unit was exist2.50 for both the beginning and ending inventory. What is net income under absorption costing? When the number of units sold exceeds the number of units produced, net income under absorption costing will be: Lower than income using variable costing The difference in income is equal to: The number of units subtracted from inventory multiplied by the fixed overhead per unit Net Income under variable costing Fixed overhead per unit Net income under absorption costing

Answer 1

Part 1

Absorption Costing Net Income = $760,700

Part 2

Income under absorption costing will be: Lower than income using variable costing

Step-by-step explanation:

The difference in net income under absorption costing and variable costing is because of fixed costs that are in closing inventory.

If we are given net income under one method we can find the net income under the other method by performing a reconciliation as follows :

Reconciliation of Variable Costing Income to Absorption Costing Income

Variable Costing Net Income $767, 200

Add fixed cost in closing stock (4, 700 × $2.50) $11,750

Less fixed costs in opening stock (7, 300 × $2.50) ($18,250)

Absorption Costing Net Income $760,700