Harold Corporation just started business in January 2012. They had no beginning inventories. During 2012 they 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 Harold Corporation's Net income for 2012 if they used variable costing instead of absorption costing?

Question

Quizplus · Accepted Answer

Under variable costing, only variable manufacturing costs are included in the cost of goods sold. Fixed manufacturing costs are treated as a period expense and are not included in the cost of goods sold. Therefore, the difference in net income between absorption costing and variable costing is equal to the amount of fixed manufacturing overhead in ending inventory ($24,000) multiplied by the number of units in ending inventory (2,000) which is $48,000. This amount is higher under absorption costing, so the net income under variable costing is $48,000 less than under absorption costing. Therefore, the difference in net income between the two methods is $4,000 less under variable costing.

Harold Corporation Just Started Business in January 2012