Exeter Mfg. Co. introduced a new mass-produced specialty product early in the year. Production and sales of this product for the first four months are as follows: Month Units Produced Units Sold
1 800 600
2 1,100 800
3 1,200 1,100
4 1,000 1,400
The firm's budgeted fixed overhead is $200,000, and budgeted output is 1,000 units per month. The volume variance, if any, is carried forward month-by-month and closed at the end of the year. When 1,000 units are produced and sold, expected monthly operating income is $40,000.
In which month(s)was variable costing income higher than absorption costing income?

Question

Quizplus · Accepted Answer

In month 4, units sold (1,400) exceeded units produced (1,000), leading to a reduction in inventory. Under variable costing, all fixed overhead is expensed, while under absorption costing, some fixed overhead is included in inventory. Thus, when inventory decreases, variable costing income is higher.