Rosewood Corporation Rosewood Corporation produces a single product.The following cost structure applied to its first year of operations:

Variable costs:

SG&A $2 per unit

Production $4 per unit

Fixed costs (total cost incurred for the year):

SG&A $14,000

Production $20,000

Refer to Rosewood Corporation.Assume for this question only that during the current year Rosewood Corporation manufactured 5,000 units and sold 3,800.There was no beginning or ending work-in-process inventory.How much larger or smaller would Rosewood Corporation's income be if it uses absorption rather than variable costing?

Question

Rosewood Corporation Rosewood Corporation produces a single product.The following cost structure applied to its first year of operations:

Variable costs:
SG&A	$2 per unit
Production	$4 per unit
Fixed costs (total cost incurred for the year):
SG&A	$14,000
Production	$20,000

Refer to Rosewood Corporation.Assume for this question only that during the current year Rosewood Corporation manufactured 5,000 units and sold 3,800.There was no beginning or ending work-in-process inventory.How much larger or smaller would Rosewood Corporation's income be if it uses absorption rather than variable costing?

Quizplus · Accepted Answer

Under absorption costing, fixed production costs are allocated to each unit produced. Therefore, the difference in income between absorption and variable costing arises from the inventory difference. With absorption costing, the fixed production costs of unsold inventory are deferred to future periods. Here, 1,200 units (5,000 manufactured - 3,800 sold) are in inventory. The fixed production cost per unit is $20,000 / 5,000 = $4. Thus, the income under absorption costing would be $4,800 larger ($4 * 1,200 units) because these costs are not expensed in the current period but deferred.

Rosewood Corporation Rosewood Corporation Produces a Single Product.The Following Cost Structure Applied