A reason why absorption costing income statements are sometimes difficult for the manager to interpret is that:
A)they omit variable expenses entirely in computing net operating income.
B)they shift portions of fixed manufacturing overhead from period to period according to changing levels of inventories.
C)they include all fixed manufacturing overhead on the income statement each year as a period cost.
D)they ignore inventory levels in computing income charges.
Fleet Corporation produces a single product. The company manufactured 700 units last year. The ending inventory consisted of 100 units. There was no beginning inventory. Variable manufacturing costs were $6.00 per unit and fixed manufacturing costs were $2.00 per unit. What would be the change in the dollar amount of ending inventory if variable costing was used instead of absorption costing?
A)$800 decrease
B)$200 decrease
C)$0
D)$200 increase
A reason why absorption costing income statements are sometimes difficult for the manager to interpret is that:
B) they shift portions of fixed manufacturing overhead from period to period according to changing levels of inventories.
The change in the dollar amount of ending inventory if variable costing was used instead of absorption costing would be:
A) $800 decrease
For the first question, the correct answer is B) they shift portions of fixed manufacturing overhead from period to period according to changing levels of inventories. Absorption costing allocates fixed manufacturing overhead to units produced, resulting in different amounts being recognized as an expense in different periods based on inventory levels.
For the second question, to determine the change in the dollar amount of ending inventory, we need to calculate the difference between the ending inventory under absorption costing and variable costing.
Under absorption costing, fixed manufacturing costs are allocated to units produced and become a part of the cost of inventory. In this case, the fixed manufacturing cost per unit is $2.00. So, under absorption costing, the value of ending inventory would be 100 units x $2.00 per unit = $200.
Under variable costing, fixed manufacturing costs are treated as period costs and are not included in the cost of inventory. In this case, the fixed manufacturing cost per unit is still $2.00. So, under variable costing, the value of ending inventory would be 100 units x $0.00 per unit = $0.
Therefore, the change in the dollar amount of ending inventory when using variable costing instead of absorption costing is $200 decrease, as the ending inventory value is reduced from $200 (absorption costing) to $0 (variable costing).
The correct answer is B) $200 decrease.
To answer the first question, we need to understand what absorption costing income statements are and how they work.
Absorption costing is a method of allocating all manufacturing costs, both fixed and variable, to the products being produced. This means that fixed manufacturing costs are included in the cost of inventory and are not expensed until the inventory is sold. On the other hand, variable costing only includes variable manufacturing costs in the cost of inventory and expenses fixed manufacturing costs immediately.
Based on this understanding, we can evaluate the options:
A) they omit variable expenses entirely in computing net operating income - This is not correct. Absorption costing includes variable expenses.
B) they shift portions of fixed manufacturing overhead from period to period according to changing levels of inventories - This is a characteristic of absorption costing.
C) they include all fixed manufacturing overhead on the income statement each year as a period cost - This is not correct. Fixed manufacturing overhead is included in the cost of inventory under absorption costing.
D) they ignore inventory levels in computing income charges - This is not correct. Inventory levels are taken into account under absorption costing.
Therefore, the correct answer is B) they shift portions of fixed manufacturing overhead from period to period according to changing levels of inventories. This shifting of fixed manufacturing overhead can make it difficult for managers to interpret the income statements.
To answer the second question, we need to calculate the ending inventory under variable costing and absorption costing and compare the difference.
Under variable costing, only variable manufacturing costs are included in the cost of inventory. In this case, the variable manufacturing cost per unit is $6.00, and the ending inventory consists of 100 units. So, the ending inventory under variable costing would be $6.00 per unit multiplied by 100 units, which equals $600.
Under absorption costing, both variable and fixed manufacturing costs are included in the cost of inventory. The fixed manufacturing cost per unit is $2.00, and the ending inventory consists of 100 units. So, the fixed manufacturing cost included in the ending inventory under absorption costing would be $2.00 per unit multiplied by 100 units, which equals $200.
To calculate the change in the dollar amount of ending inventory, we subtract the ending inventory under variable costing ($600) from the ending inventory under absorption costing ($200). The difference is -$400, indicating a decrease in the dollar amount of ending inventory.
Therefore, the correct answer is A) $800 decrease.