The level of inventory of a manufactured product has increas

The level of inventory of a manufactured product has increased by 8,731 units during a period. The following data are also available: Variable Fixed Unit manufacturing costs of the period $11 $7 Unit operating expenses of the period $1 $1 What would be the effect on income from operations if absorption costing is used rather than variable costing?

a. $61,117 increase

b. $61,117 decrease

c. $69,848 increase

d. $69,848 decrease

Solution

The correct answer is option A $61,117 increase

it is because in absorption costing value of closing stock is greater then the value of closing stock in absorption costing.

we level of inventory of 8731 units

closing stock under variable costing will be = units of closing stock * variable manufacturing cost

8731 units*$11=$96041

closing stock under absorption costing will be = units of closing stock * (variable manufacturing cost+ fixed manufacturing cost)

8731 units *($11+7)=$157158

so closing stock is directly related to profit .Means if value of closing stock is more then profit will be more.If value of closing is less then profit will be less.

so under absorption costing profit will be increase($157158-$96041)= $61,117

In absorption costing profit will be increase by $61,117

Note. operating are not part of closing stock.