Rubble Enterprises develops an annual overhead budget at the start of each year (which has remained unchanged for the last 2 years), and closes any over- or underapplied overhead at year-end. For the firm's single product the following ending inventory levels have been experienced during the last 7 months: Month Units
December 31 300
January 31 300
February 28 200
March 31 400
April 30 300
May 31 400
June 30 500
In how many months would variable costing income be lower than absorption costing income?

Question

Quizplus · Accepted Answer

To determine the months in which variable costing income would be lower than absorption costing income, we need to compare the difference between the two methods for each month. The difference is based on the change in inventory levels, which affects the treatment of fixed overhead costs. When inventory levels increase, absorption costing will assign a lower portion of fixed overhead cost to each unit, resulting in higher reported net income. Conversely, when inventory levels decrease, absorption costing will assign a higher portion of fixed overhead cost to each unit, resulting in lower reported net income. In this case, we see inventory levels increasing from February to June, meaning that absorption costing will result in higher net income in those months. Therefore, the answer is three months (February, April, and June) as variable costing income would be lower than absorption costing income in those months.

Rubble Enterprises Develops an Annual Overhead Budget at the Start