The following information pertains to ABC Corporation:

What is the difference between absorption costing operating income and variable costing operating income?

Question

The following information pertains to ABC Corporation:

What is the difference between absorption costing operating income and variable costing operating income?

Quizplus · Accepted Answer

The difference between absorption costing operating income and variable costing operating income is equal to the change in ending inventory units multiplied by the fixed manufacturing overhead per unit under absorption costing. From the given information, we can calculate:
Variable costing operating income = Sales - Variable expenses - Variable selling and administrative expenses - Fixed manufacturing overhead (directly expensed) = 450,000 - 270,000 - 60,000 - 70,000 = 50,000
Absorption costing operating income = Sales - Cost of goods sold (based on absorption costing) - Selling and administrative expenses = 450,000 - [(70,000 + (12,000 - 7,500) x ($60,000 / 12,000))] - 60,000 = 38,500
Difference = Absorption costing operating income - Variable costing operating income = 38,500 - 50,000 = -11,500
Therefore, the difference between absorption costing operating income and variable costing operating income is $11,500.

The Following Information Pertains to ABC Corporation