Managerial Accounting Quiz: Reconciling Variable And Absorption Costing
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Reconciling Variable And Absorption CostingQuestion 1 of 20

A manufacturing company began the year with no inventory. During the year, it produced 15,000 units and sold 12,000 units. Total fixed manufacturing overhead was $90,000. The company's operating income under variable costing was $200,000.

Based on the information provided, what was the company's operating income under absorption costing?

$182,000
$200,000
$218,000
$222,500
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Managerial Accounting Quiz

Managerial Accounting Quiz: Reconciling Variable And Absorption Costing

Practice Reconciling Variable And Absorption Costing in Managerial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Reconciling Variable And Absorption Costing, giving you a quick way to practice the rules, question types, and explanations that matter most for Managerial Accounting.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

A manufacturing company began the year with no inventory. During the year, it produced 15,000 units and sold 12,000 units. Total fixed manufacturing overhead was $90,000. The company's operating income under variable costing was $200,000.

Based on the information provided, what was the company's operating income under absorption costing?

  1. $182,000
  2. $200,000
  3. $218,000 (correct answer)
  4. $222,500
Explanation: The reconciliation of variable costing and absorption costing income is based on the treatment of fixed manufacturing overhead (FMOH). The difference is the amount of FMOH deferred in, or released from, inventory.\n\n1. Calculate the predetermined FMOH rate per unit: \text{Rate} = \frac{\text{Total FMOH}}{\text{Units Produced}} = \frac{\text{\90,000}}{15,000 \text{ units}} = \text{$6} \text{ per unit}.\n2.∗∗Calculatethechangeininventoryinunits:∗∗.\n2. **Calculate the change in inventory in units:** \text{Change} = \text{Units Produced} - \text{Units Sold} = 15,000 - 12,000 = 3,000 \text{ units}.Sinceproductionexceedssales,inventoryincreased.\n3.∗∗CalculatetheamountofFMOHdeferredinendinginventory:∗∗. Since production exceeds sales, inventory increased.\n3. **Calculate the amount of FMOH deferred in ending inventory:** \text{Deferred FMOH} = \text{Change in Inventory} \times \text{FMOH Rate} = 3,000 \text{ units} \times \text{$6/unit} = \text{$18,000}.\n4.∗∗Reconciletheoperatingincomes:∗∗Wheninventoryincreases,absorptioncostingincomeishigherthanvariablecostingincome..\n4. **Reconcile the operating incomes:** When inventory increases, absorption costing income is higher than variable costing income. \text{Absorption OI} = \text{Variable OI} + \text{Deferred FMOH} = \text{$200,000} + \text{$18,000} = \text{$218,000}$.

Question 2

For its most recent fiscal year, a company reported an operating income of $75,000 under absorption costing and $63,000 under variable costing. The company produced 20,000 units and had total fixed manufacturing overhead costs of $48,000.

Assuming the company had no beginning inventory, how many units were sold during the year?

  1. 15,000 units (correct answer)
  2. 17,600 units
  3. 22,400 units
  4. 25,000 units
Explanation: The difference in operating income between the two methods can be used to determine the change in inventory units, which then allows for the calculation of units sold.\n\n1. Calculate the difference in operating income: \text{Difference} = \text{Absorption OI} - \text{Variable OI} = \text{\75,000} - \text{$63,000} = \text{$12,000}.Sinceabsorptioncostingincomeishigher,productionmusthaveexceededsales.\n2.∗∗CalculatethepredeterminedFMOHrateperunit:∗∗. Since absorption costing income is higher, production must have exceeded sales.\n2. **Calculate the predetermined FMOH rate per unit:** \text{Rate} = \frac{\text{Total FMOH}}{\text{Units Produced}} = \frac{\text{$48,000}}{20,000 \text{ units}} = \text{$2.40} \text{ per unit}.\n3.∗∗Calculatethechangeininventoryinunits:∗∗.\n3. **Calculate the change in inventory in units:** \text{Change in Inventory} = \frac{\text{Difference in OI}}{\text{FMOH Rate}} = \frac{\text{$12,000}}{\text{$2.40/unit}} = 5,000 \text{ units}.Thisrepresentstheincreaseininventory.\n4.∗∗Calculateunitssold:∗∗. This represents the increase in inventory.\n4. **Calculate units sold:** \text{Units Sold} = \text{Units Produced} - \text{Increase in Inventory} = 20,000 - 5,000 = 15,000 \text{ units}$.

Question 3

Over a two-year period, a company had the following production and sales data:\n* Year 1: Produced 10,000 units, Sold 8,000 units\n* Year 2: Produced 10,000 units, Sold 12,000 units\nThe predetermined fixed manufacturing overhead rate was $5 per unit in both years. There was no beginning inventory in Year 1.

What is the relationship between absorption costing operating income (AC OI) and variable costing operating income (VC OI) for Year 2?

  1. AC OI is $10,000 greater than VC OI.
  2. AC OI is $10,000 less than VC OI. (correct answer)
  3. AC OI is equal to VC OI.
  4. The relationship cannot be determined without revenue data.
Explanation: The difference between absorption and variable costing income is determined by the change in inventory levels during the period.\n\n1. Analyze Year 2 inventory change: In Year 2, the company sold 12,000 units but only produced 10,000 units. This means inventory decreased by 2,000 units (10,000−12,000=−2,00010,000 - 12,000 = -2,000).\n2. Calculate the FMOH released from inventory: When inventory decreases, fixed manufacturing overhead costs from a prior period (which were stored in beginning inventory) are released and expensed through COGS under absorption costing. The amount released is 2,000 \text{ units} \times \text{\5/unit} = \text{$10,000}$.\n3. Determine the income relationship: Because an additional $10,000 of fixed overhead from a prior period is expensed under absorption costing in Year 2, its operating income will be $10,000 less than variable costing operating income. Under variable costing, all fixed overhead from Year 2 was already expensed in Year 2, and the costs from Year 1 were expensed in Year 1.

Question 4

A company reports operating income under absorption costing is $40,000 higher than under variable costing for the year. Total budgeted and actual fixed manufacturing overhead was $320,000. To determine the exact change in inventory units for the period, which of the following additional pieces of information is essential?

Which additional piece of information is required to determine the exact change in inventory units for the period?

  1. The selling price per unit.
  2. The number of units produced. (correct answer)
  3. The total variable manufacturing cost.
  4. The number of units in ending inventory.
Explanation: The formula to reconcile the two income figures is: Difference in OI=(Units Produced−Units Sold)×FMOH rate per unit\text{Difference in OI} = (\text{Units Produced} - \text{Units Sold}) \times \text{FMOH rate per unit}. We know the difference in OI (40,000)andthetotalFMOH(40,000) and the total FMOH (320,000), but we need to find the change in inventory units (Units Produced−Units Sold\text{Units Produced} - \text{Units Sold}). To do this, we must first find the FMOH rate per unit. The rate is calculated as Total FMOHDenominator Level Units\frac{\text{Total FMOH}}{\text{Denominator Level Units}}. In this case, the denominator level is the number of units produced. Therefore, knowing the number of units produced is essential to calculate the rate, which can then be used to find the change in inventory units.

Question 5

A manager's bonus is tied to quarterly operating income calculated using absorption costing. Near the end of a quarter with weak sales, the manager authorizes a significant increase in production, far exceeding the current sales forecast. All units produced are of good quality.

Which of the following best describes the immediate impact of the manager's decision?

  1. Both absorption and variable costing income will increase due to higher production efficiency.
  2. Absorption costing income will increase, while variable costing income will remain unaffected. (correct answer)
  3. Variable costing income will increase, while absorption costing income will remain unaffected.
  4. Both absorption and variable costing income will decrease due to the costs of carrying excess inventory.
Explanation: The core difference between the methods is the treatment of fixed manufacturing overhead (FMOH). Under absorption costing, FMOH is a product cost. By increasing production without a corresponding increase in sales, more of the period's FMOH is attached to the unsold units and deferred in ending inventory, rather than being expensed in the current period. This lowers the Cost of Goods Sold and increases absorption costing income. Under variable costing, all FMOH is treated as a period cost and is expensed in the quarter it is incurred, regardless of the production level. Therefore, increasing production has no effect on variable costing income.

Question 6

A company provides its variable costing income statement, which shows an operating income of $150,000. Further data reveals: beginning inventory was 2,000 units, 20,000 units were produced, and 18,000 units were sold. The fixed manufacturing overhead cost per unit produced was $12.

What is the company's operating income under absorption costing?

  1. $126,000
  2. $150,000
  3. $174,000 (correct answer)
  4. $198,000
Explanation: The reconciliation requires calculating the fixed manufacturing overhead (FMOH) deferred in inventory.\n\n1. Calculate the change in inventory in units: Change=Units Produced−Units Sold=20,000−18,000=2,000 units\text{Change} = \text{Units Produced} - \text{Units Sold} = 20,000 - 18,000 = 2,000 \text{ units}. Inventory increased by 2,000 units.\n2. Calculate the amount of FMOH deferred in inventory: \text{Deferred FMOH} = \text{Increase in Inventory} \times \text{FMOH Rate} = 2,000 \text{ units} \times \text{\12/unit} = \text{$24,000}.\n3.∗∗Reconciletheoperatingincomes:∗∗Wheninventoryincreases,absorptioncostingincomeishigherthanvariablecostingincomebecauseaportionoffixedoverheadisdeferredtothebalancesheet..\n3. **Reconcile the operating incomes:** When inventory increases, absorption costing income is higher than variable costing income because a portion of fixed overhead is deferred to the balance sheet. \text{Absorption OI} = \text{Variable OI} + \text{Deferred FMOH} = \text{$150,000} + \text{$24,000} = \text{$174,000}$.

Question 7

Last year, a company produced 50,000 units and sold 55,000 units. Its operating income was $280,000 under absorption costing and $315,000 under variable costing.

What was the company's fixed manufacturing overhead rate per unit?

  1. $5.09 per unit
  2. $5.60 per unit
  3. $6.30 per unit
  4. $7.00 per unit (correct answer)
Explanation: We can work backwards from the difference in operating incomes to find the fixed manufacturing overhead (FMOH) rate.\n\n1. Calculate the difference in operating income: \text{Difference} = \text{Absorption OI} - \text{Variable OI} = \text{\280,000} - \text{$315,000} = -\text{$35,000}.Thenegativesignindicatesthatvariablecostingincomewashigher,whichisconsistentwithsalesexceedingproduction.\n2.∗∗Calculatethechangeininventoryinunits:∗∗. The negative sign indicates that variable costing income was higher, which is consistent with sales exceeding production.\n2. **Calculate the change in inventory in units:** \text{Change} = \text{Units Produced} - \text{Units Sold} = 50,000 - 55,000 = -5,000 \text{ units}.Inventorydecreasedby5,000units.\n3.∗∗CalculatetheFMOHrate:∗∗ThedifferenceinincomeistheresultoftheFMOHreleasedfrominventory.. Inventory decreased by 5,000 units.\n3. **Calculate the FMOH rate:** The difference in income is the result of the FMOH released from inventory. \text{FMOH Rate} = \frac{\text{Difference in OI}}{\text{Change in Inventory}} = \frac{-\text{$35,000}}{-5,000 \text{ units}} = \text{$7.00} \text{ per unit}$.

Question 8

For the month of March, a company's absorption costing net income was $64,000, while its variable costing net income was $76,000. The company's predetermined fixed manufacturing overhead rate is $4 per unit. Beginning inventory was 8,000 units.

How many units were in the company's ending inventory?

  1. 3,000 units
  2. 5,000 units (correct answer)
  3. 8,000 units
  4. 11,000 units
Explanation: This problem requires a multi-step calculation starting with the income difference.\n\n1. Calculate the difference in operating income: \text{Difference} = \text{Absorption OI} - \text{Variable OI} = \text{\64,000} - \text{$76,000} = -\text{$12,000}.\n2.∗∗Calculatethechangeininventoryinunits:∗∗Sincevariablecostingincomeishigher,inventorymusthavedecreased..\n2. **Calculate the change in inventory in units:** Since variable costing income is higher, inventory must have decreased. \text{Change in Inventory} = \frac{\text{Difference in OI}}{\text{FMOH Rate}} = \frac{-\text{$12,000}}{\text{$4/unit}} = -3,000 \text{ units}.Thisisthenetdecreaseininventoryfortheperiod.\n3.∗∗Calculateendinginventory:∗∗. This is the net decrease in inventory for the period.\n3. **Calculate ending inventory:** \text{Ending Inventory} = \text{Beginning Inventory} + \text{Change in Inventory} = 8,000 \text{ units} - 3,000 \text{ units} = 5,000 \text{ units}$.

Question 9

A company's policy is to maintain zero ending inventory at the end of each fiscal year. During the most recent year, total fixed manufacturing overhead was $250,000, and total fixed selling & administrative expense was $120,000.

What is the expected difference between the company's annual operating income calculated under absorption costing versus variable costing?

  1. $250,000
  2. $130,000
  3. $120,000
  4. $0 (correct answer)
Explanation: The difference between absorption costing and variable costing operating income is solely due to the change in the amount of fixed manufacturing overhead capitalized in inventory. If a company maintains zero ending inventory, and presumably starts with zero beginning inventory, then the number of units produced must equal the number of units sold. When production equals sales, there is no change in inventory levels. Consequently, no fixed manufacturing overhead is deferred in or released from inventory, and the operating incomes under both methods will be identical. The amounts of the fixed costs are irrelevant to the difference.

Question 10

Which of the following scenarios will result in variable costing operating income being greater than absorption costing operating income for a given period?

Which of the following scenarios will result in variable costing operating income being greater than absorption costing operating income for a given period?

  1. A start-up company ramps up production in anticipation of future sales, resulting in a large finished goods inventory.
  2. A company maintains a just-in-time inventory system where units produced daily match units sold daily.
  3. A company sells more units than it produces by drawing down inventory from a previous period. (correct answer)
  4. A company incurs a substantial increase in fixed manufacturing overhead costs but production levels remain constant.
Explanation: Variable costing operating income is greater than absorption costing operating income when the number of units sold exceeds the number of units produced. In this situation, inventory levels decrease. Under absorption costing, the cost of goods sold includes not only all of the fixed manufacturing overhead (FMOH) from the current period's production (which is now attached to fewer units) but also the FMOH that was capitalized in the beginning inventory that was sold. This release of previously deferred FMOH results in higher expenses and lower operating income for absorption costing compared to variable costing.

Question 11

A company's absorption costing income was $400,000 and its variable costing income was $370,000. Ending inventory for the period was 10,000 units. The fixed manufacturing overhead rate is $5 per unit.

What was the beginning inventory in units?

  1. 4,000 units (correct answer)
  2. 6,000 units
  3. 10,000 units
  4. 16,000 units
Explanation: This problem requires working backward from the income difference to find the change in inventory, and then using that to find the beginning inventory.\n\n1. Calculate the difference in operating income: \text{Difference} = \text{Absorption OI} - \text{Variable OI} = \text{\400,000} - \text{$370,000} = \text{$30,000}.\n2.∗∗Calculatethechangeininventoryinunits:∗∗Sinceabsorptionincomeishigher,inventoryincreased..\n2. **Calculate the change in inventory in units:** Since absorption income is higher, inventory increased. \text{Change in Inventory} = \frac{\text{Difference in OI}}{\text{FMOH Rate}} = \frac{\text{$30,000}}{\text{$5/unit}} = 6,000 \text{ units}.Thisisthenetincreaseininventory.\n3.∗∗Calculatebeginninginventory:∗∗Weknowthat. This is the net increase in inventory.\n3. **Calculate beginning inventory:** We know that \text{Ending Inventory} = \text{Beginning Inventory} + \text{Change in Inventory}.Rearrangingtheformulagives. Rearranging the formula gives \text{Beginning Inventory} = \text{Ending Inventory} - \text{Change in Inventory} = 10,000 \text{ units} - 6,000 \text{ units} = 4,000 \text{ units}$.

Question 12

A company has a fixed manufacturing overhead rate of $5 per unit. During the year, the value of its inventory, costed under absorption costing, increased by $300,000. The variable manufacturing cost per unit is $10.

Based on this information, what is the difference between the company's absorption costing and variable costing operating income for the year?

  1. Absorption income is $100,000 higher. (correct answer)
  2. Absorption income is $150,000 higher.
  3. Absorption income is $300,000 higher.
  4. The difference cannot be determined.
Explanation: This question requires separating the fixed and variable components of the inventory value change.
  1. Determine the total absorption cost per unit: Absorption Cost/Unit = Variable Mfg. Cost + Fixed MOH Rate = $10 + $5 = $15.
  2. Calculate the change in inventory in units: Change in Units = Increase in Inventory Value / Absorption Cost/Unit = $300,000 / $15/unit = 20,000 units.
  3. Calculate the income difference: The difference in operating income is the change in inventory units multiplied by only the fixed manufacturing overhead rate. Difference = Change in Units × FMOH Rate = 20,000 units × $5/unit = $100,000. As inventory increased, absorption income is higher by $100,000.

Question 13

A company had beginning inventory of 5,000 units and ending inventory of 8,000 units. The company's operating income under variable costing was $190,000, and its fixed manufacturing overhead costs were $250,000 for the period. The number of units sold was 22,000.

What was the company's operating income under absorption costing?

  1. $208,000
  2. $210,000
  3. $220,000 (correct answer)
  4. $240,000
Explanation: This question requires calculating the fixed manufacturing overhead (FMOH) rate before reconciling the income figures.
  1. Calculate units produced: Units Produced = Units Sold + Ending Inventory - Beginning Inventory = 22,000 + 8,000 - 5,000 = 25,000 units.
  2. Calculate the FMOH rate per unit: Rate = Total FMOH / Units Produced = $250,000 / 25,000 units = $10 per unit.
  3. Calculate the change in inventory in units: Change = Ending Inventory - Beginning Inventory = 8,000 - 5,000 = 3,000 units (increase).
  4. Calculate deferred FMOH: Deferred FMOH = 3,000 units × $10/unit = $30,000.
  5. Reconcile incomes: As inventory increased, absorption income is higher. Absorption OI = Variable OI + Deferred FMOH = $190,000 + $30,000 = $220,000.

Question 14

A company experienced a decrease in inventory of 4,000 units during the period. The company's fixed manufacturing overhead rate is $7 per unit, and its fixed selling and administrative expense is $50,000 for the period.

By how much does the variable costing operating income differ from the absorption costing operating income?

  1. Variable costing income is $28,000 higher. (correct answer)
  2. Absorption costing income is $28,000 higher.
  3. Variable costing income is $22,000 higher.
  4. Absorption costing income is $22,000 higher.
Explanation: The difference between the two costing methods is entirely due to the treatment of fixed manufacturing overhead (FMOH) and the change in inventory levels. Fixed selling and administrative expenses are treated as period costs under both methods and do not contribute to the difference.\n
  1. Identify the change in inventory: Inventory decreased by 4,000 units.
  2. Calculate the FMOH released from inventory: \text{Released FMOH} = \text{Decrease in Inventory} \times \text{FMOH Rate} = 4,000 \text{ units} \times \text{\7/unit} = \text{$28,000}$.\n3. Determine the income relationship: When inventory decreases, absorption costing recognizes all of the current period's FMOH plus the FMOH carried in the inventory that was sold. This leads to higher expenses and lower income compared to variable costing. Thus, variable costing income is higher by $28,000.

Question 15

A company's absorption costing income for the month was $120,000. Beginning inventory was 3,000 units and ending inventory was 1,500 units. The predetermined fixed manufacturing overhead rate is $10 per unit.

What was the company's operating income under variable costing for the month?

  1. $105,000
  2. $120,000
  3. $135,000 (correct answer)
  4. $150,000
Explanation: To reconcile the incomes, we must determine the amount of fixed manufacturing overhead (FMOH) released from inventory.\n\n1. Calculate the change in inventory in units: Change=Ending Inventory−Beginning Inventory=1,500−3,000=−1,500 units\text{Change} = \text{Ending Inventory} - \text{Beginning Inventory} = 1,500 - 3,000 = -1,500 \text{ units}. The inventory level decreased.\n2. Calculate the FMOH released from inventory: \text{Released FMOH} = \text{Decrease in Inventory} \times \text{FMOH Rate} = 1,500 \text{ units} \times \text{\10/unit} = \text{$15,000}.\n3.∗∗Reconciletheoperatingincomes:∗∗Wheninventorydecreases,absorptioncostingexpensesthecurrentperiod′sFMOHplustheFMOHfrombeginninginventory.Thisresultsinalowerincomecomparedtovariablecosting.Therefore,variablecostingincomeishigher..\n3. **Reconcile the operating incomes:** When inventory decreases, absorption costing expenses the current period's FMOH plus the FMOH from beginning inventory. This results in a lower income compared to variable costing. Therefore, variable costing income is higher. \text{Variable OI} = \text{Absorption OI} + \text{Released FMOH} = \text{$120,000} + \text{$15,000} = \text{$135,000}$.

Question 16

In its first year of operations, a company produced 25,000 units and sold 22,000 units. In its second year, it produced 30,000 units and sold 33,000 units. The fixed manufacturing overhead rate was $20 per unit in Year 1 and $18 per unit in Year 2.

By how much will absorption costing income differ from variable costing income in Year 2?

  1. Variable costing income will be $54,000 higher.
  2. Variable costing income will be $60,000 higher. (correct answer)
  3. Absorption costing income will be $54,000 higher.
  4. Absorption costing income will be $60,000 higher.
Explanation: The difference in income in Year 2 is determined by the fixed manufacturing overhead (FMOH) released from beginning inventory.\n
  1. Determine the source of units sold in Year 2: The company sold 33,000 units but only produced 30,000. The 3,000 unit shortfall must have come from beginning inventory.
  2. Determine the cost of beginning inventory: The beginning inventory for Year 2 is the ending inventory from Year 1. These units were produced in Year 1 when the FMOH rate was $20 per unit.
  3. Calculate FMOH released: The total FMOH released from inventory is 3,000 \text{ units} \times \text{\20/unit} = \text{$60,000}$.\n4. Determine the income relationship: Since inventory decreased, more fixed costs (current period's plus the amount from inventory) are expensed under absorption costing than under variable costing. Therefore, variable costing income will be higher by the amount of FMOH released, which is $60,000.

Question 17

Over the complete life cycle of a business entity, from its inception to its final liquidation where all inventory is sold, what is the expected relationship between the cumulative operating income reported under absorption costing and variable costing?

What is the expected relationship between the cumulative operating income reported under absorption costing and variable costing?

  1. Cumulative absorption costing income will be higher due to the capitalization of fixed costs.
  2. Cumulative variable costing income will be higher as it provides a better measure of performance.
  3. The cumulative operating incomes will be equal. (correct answer)
  4. The relationship depends on the pattern of production versus sales over the company's life.
Explanation: The difference between absorption and variable costing is one of timing. Absorption costing defers the recognition of fixed manufacturing overhead (FMOH) costs by capitalizing them into inventory, while variable costing expenses them as incurred. Over the entire life of a company, all units produced are ultimately sold. Therefore, all FMOH that was ever capitalized into inventory under absorption costing is eventually charged to Cost of Goods Sold. In the long run, the total amount of FMOH expensed is identical under both methods, leading to equal cumulative operating incomes.

Question 18

A company produces a single product. Data for the year include: beginning inventory of 0 units, production of 25,000 units, and sales of 20,000 units. The variable manufacturing cost is $10 per unit. Fixed manufacturing overhead is $125,000. Selling price is $30 per unit. Fixed S&A costs are $50,000.

What is the total value of ending inventory under absorption costing?

  1. $50,000
  2. $75,000 (correct answer)
  3. $85,000
  4. $150,000
Explanation: The value of ending inventory under absorption costing includes all manufacturing costs: direct materials, direct labor, variable overhead, and fixed overhead.\n\n1. Calculate ending inventory in units: Ending Inventory=Beginning Inventory+Production−Sales=0+25,000−20,000=5,000 units\text{Ending Inventory} = \text{Beginning Inventory} + \text{Production} - \text{Sales} = 0 + 25,000 - 20,000 = 5,000 \text{ units}.\n2. Calculate the fixed manufacturing overhead rate per unit: \text{Rate} = \frac{\text{Total FMOH}}{\text{Units Produced}} = \frac{\text{\125,000}}{25,000 \text{ units}} = \text{$5} \text{ per unit}.\n3.∗∗Calculatethefullabsorptioncostperunit:∗∗.\n3. **Calculate the full absorption cost per unit:** \text{Unit Cost} = \text{Variable Mfg. Cost} + \text{Fixed MOH Rate} = \text{$10} + \text{$5} = \text{$15} \text{ per unit}.\n4.∗∗Calculatethevalueofendinginventory:∗∗.\n4. **Calculate the value of ending inventory:** \text{Value} = \text{Ending Inventory Units} \times \text{Unit Cost} = 5,000 \text{ units} \times \text{$15/unit} = \text{$75,000}$.

Question 19

Stellar Manufacturing produces specialty widgets. For the year ended December 31, the company produced 50,000 units and sold 45,000 units. Variable manufacturing costs were $15 per unit, and fixed manufacturing overhead was $400,000. There were no beginning inventories. Under absorption costing, operating income was $180,000. What was the operating income under variable costing?

  1. $140,000 (correct answer)
  2. $160,000
  3. $200,000
  4. $220,000
Explanation: The difference between absorption and variable costing operating income equals the fixed overhead in ending inventory. Ending inventory = 50,000 - 45,000 = 5,000 units. Fixed overhead per unit = $400,000 ÷ 50,000 = $8. Fixed overhead in ending inventory = 5,000 × $8 = $40,000. Since absorption costing includes this fixed overhead in inventory (higher operating income), variable costing operating income = $180,000 - $40,000 = $140,000. Choice B incorrectly uses half the difference. Choice C adds instead of subtracts. Choice D incorrectly calculates the per-unit fixed overhead.

Question 20

Vega Industries had variable costing operating income of $450,000 for the fiscal year. The company's inventory levels and fixed overhead data were as follows: Beginning inventory contained $180,000 of fixed overhead costs, ending inventory contained $225,000 of fixed overhead costs, and total fixed manufacturing overhead incurred during the year was $1,800,000. What was the absorption costing operating income?

  1. $405,000
  2. $495,000 (correct answer)
  3. $630,000
  4. $675,000
Explanation: The difference between absorption and variable costing operating income equals the change in fixed overhead stored in inventory. Beginning inventory fixed overhead: $180,000. Ending inventory fixed overhead: $225,000. Change in fixed overhead in inventory = $225,000 - $180,000 = $45,000 increase. When fixed overhead in inventory increases, absorption costing shows higher operating income than variable costing because more fixed costs are deferred to future periods. Absorption costing operating income = $450,000 + $45,000 = $495,000. Choice A incorrectly subtracts the difference. Choices C and D reflect errors in understanding the relationship between inventory changes and costing methods.