Focus Picture Company sold 5,600 units and produced 6,000 units this past year. Unit variable costs were £15 (including variable selling costs of £3), and total fixed manufacturing costs totaled £16,500. Which costing system (variable or absorption) will show a higher net income and by how much?

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing costs are allocated to each unit produced. Therefore, when production exceeds sales, as in this case (6,000 units produced vs. 5,600 units sold), some fixed costs are deferred in inventory, leading to a higher net income compared to variable costing, where all fixed costs are expensed in the period incurred. The difference in net income is calculated based on the fixed manufacturing cost per unit that is deferred in inventory under absorption costing. The fixed manufacturing cost per unit is £16,500 / 6,000 units = £2.75 per unit. The difference in net income is this rate times the difference in units produced and sold: £2.75 * (6,000 - 5,600) = £1,100.

Focus Picture Company Sold 5,600 Units and Produced 6,000 Units