Fly Boy Company manufactures fishing rods with a variable cost of $35. The rods sell for $54. Budgeted fixed manufacturing overhead for the most recent year was $784,000. Actual production was equal to planned production. Required: Under each of the following conditions, state (1) whether operating income is higher under variable or absorption costing and (2) the amount of the difference in reported operating income under the two methods. Treat each condition as an independent case. A. Production ...............................................196,000 units Sales .......................................................192,000 units B. Production ...............................................128,000 units Sales .......................................................136,000
units C. Production ...............................................180,000 units Sales .......................................................180,000 units
What will be an ideal response?
| A. | 1. | Inventory increases by 4,000 units, so operating income |
| ? | is greater under absorption costing. |
| 2. | Fixed overhead rate per unit = $784,000 / 196,000 = $4.00 |
| ? | Difference in reported operating income = $4.00 × 4,000 = $16,000 |
| B. | 1. | Inventory decreases by 8,000 units, so operating income is |
| ? | greater under variable costing. |
| 2. | Fixed overhead rate per unit = $784,000 / 128,000 = $6.125 |
| ? | Difference in reported operating income = $6.125 × 8,000 = $49,000 |
| C. | 1. | Inventory remains unchanged, so there is no difference in |
| ? | reported operating income under the two methods of product costing. |
| 2. | No difference. |
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