Use this information for Timmer Corporation to answer the questions that follow.

Timmer Corporation just started business in January. There were no beginning inventories. During the year, it manufactured 12,000 units of product and sold 10,000 units. The selling price of each unit was $20. Variable manufacturing costs were $4 per unit, and variable selling and administrative costs were $2 per unit. Fixed manufacturing costs were $24,000, and fixed selling and administrative costs were $6,000.

-What would be the difference in Timmer's net income for the year if it used variable costing instead of absorption costing?
A) no difference
B) $2,000 greater
C) $4,000 less
D) $6,000 less

Question

Use this information for Timmer Corporation to answer the questions that follow.

Timmer Corporation just started business in January. There were no beginning inventories. During the year, it manufactured 12,000 units of product and sold 10,000 units. The selling price of each unit was $20. Variable manufacturing costs were $4 per unit, and variable selling and administrative costs were $2 per unit. Fixed manufacturing costs were $24,000, and fixed selling and administrative costs were $6,000.

-What would be the difference in Timmer's net income for the year if it used variable costing instead of absorption costing?
A) no difference
B) $2,000 greater
C) $4,000 less
D) $6,000 less

Quizplus · Accepted Answer

Under variable costing, only variable manufacturing costs (such as direct materials, direct labor, and variable overhead) are included as product costs, while fixed manufacturing costs (such as production supervisors' salaries and plant rent) are treated as period costs and are expensed in the period incurred. On the other hand, absorption costing includes both variable and fixed manufacturing costs as product costs.

Assuming that Timmer produces and sells the same number of units in the year, the only difference between the two costing methods would be the treatment of fixed manufacturing overhead costs.

Under variable costing, Timmer would only incur $12,000 of fixed overhead costs ($2 per unit x 6,000 units produced), which would be expensed in full in the period incurred.

Under absorption costing, however, Timmer would allocate the entire $24,000 of fixed overhead costs ($4 per unit x 6,000 units produced) to the units produced and treat it as a product cost.

As a result, the cost of goods sold under absorption costing would be higher than under variable costing, leading to a lower net income. Specifically, the difference would be $4,000 ($24,000 - $12,000), which means that Timmer's net income would be $4,000 less if it used absorption costing instead of variable costing.

Use This Information for Timmer Corporation to Answer the Questions