The level of inventory of a manufactured product has increas

The level of inventory of a manufactured product has increased by 8,315 units during a period. The following data are also available:

Variable Fixed

Unit manufacturing costs of the period: $14 $3

Unit operating expenses of the period: $4 $5

What would be the effect on income from operations if variable costing is used rather than absorption costing?

Solution

If variable costing is used rather than absorption costing then it means:

Income from operations is Decrease by (8315*3) = 24945

because in absorption costing unit manufacturing cost either variable or fixed will be taken as unit cost but in variable costing fixed manufacturing cost will be taken as period cost.

so Total fixed manufacturing cost will be deducted in variable costing and income from operation will decrease by (8315*3) = 24945