Musa Company's inventory balances for the beginning and ending of 2008, using both variable costing and absorption costing, are shown below: 12/31/08 1/1/08
Variable costing $1,200 $1,200
Absorption costing 1,420 1,260
Variable costing income for 2004 was $3,460. If absorption costing had been used, income for 2008 would be:

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead is included in inventory costs. The increase in inventory from $1,260 to $1,420 means some fixed overhead costs are deferred in inventory, increasing income by $160 ($1,420 - $1,260). Therefore, absorption costing income is $3,460 + $160 = $3,620.

Musa Company's Inventory Balances for the Beginning and Ending of 2008