Venus Corporation incurred fixed manufacturing costs of $4,800 during 2017. Other information for 2017 includes:
The budgeted denominator level is 1,600 units.
Units produced total 770 units.
Units sold total 630 units.
Beginning inventory was zero.
The company uses variable costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.
Operating income using variable costing will be ________ than operating income if using absorption costing.
A) $2,490 higher
B) $2,490 lower
C) $1,890 higher
D) $420 lower

Question

Quizplus · Accepted Answer

The fixed manufacturing expense attributable to each unit produced is $3 ($4,800/1,600 units). Different operating incomes are reported because the unit level of inventory increased during the accounting period by 140 units × $3 denominator rate = $420. Therefore, operating income is $420 lower under variable costing because $420 of fixed manufacturing costs remains in inventory under absorption costing.

Venus Corporation Incurred Fixed Manufacturing Costs of $4,800 During 2017