Question

Vita Ade produced 16,000 cases of powdered drink mix and sold 15,000 cases in April 2018. The sales price was $27, variable costs were $9 per case ($7 manufacturing and $2 selling and administrative), and total fixed costs were $95,000 ($80,000 manufacturing overhead and $15,000 selling and administrative). The company had no beginning Finished Goods Inventory. Vita Ade calculated the cost per unit and the total cost of the 1,000 cases in Finished Goods Inventory as of April 30 using both the absorption and variable costing methods. The calculations are presented below. Click the icon to view the calculations using the absortion and variable costing methods.) Read the requirements. Requirement 1. Which costing method produces the highest operating income? Explain why. The cost method produces the highest operating income. The primary reason for this is that the unit cost. Under the absorption costing method, $ are distributed across the entire production run as part of of fixed manufacturing costs are Under the variable costing method, this amount is Requirement 2. Which costing method produces the highest April 30 balance in Finished Goods Inventory? Explain why. O A. The finished goods inventory under the absorption costing method is higher than under the variable costing method. The primary reason for this is that the absorption costing method considers selling and administrative costs to be product costs, and the variable costing method considers them period costs. OB. The finished goods inventory under the absorption costing method is lower than under the variable costing method. The primary reason for this is that with variable costing, some manufacturing fixed costs are still in Finished Goods Inventory on the balance sheet and have not been expensed. O C. The finished goods inventory under the absorption costing method is lower than under the variable costing method. The primary reason for this is that the unit cost is higher under variable costing because fixed manufacturing costs are considered a product cost and are not expensed as a period cost, as they would be under the absorption costing method. OD. The finished goods inventory under the absorption costing method is higher than under the variable costing method. The primary reason for this is that the unit cost is higher under absorption costing because fixed manufacturing costs are absorbed by the entire nraduction run and not exnensed as a nerind cost as they would he under the variable costing method

Answer 1

1.Absorption costing produces highest operating income

Reason is that Fixed manufacturing overhead costs are distributed

80,000*1000/16000 = $5000 are carried in inventory

And 75000 is charged in cost of sales

Under variable costing, full amount is charged i.e. $80,000

2.D. Absorption costing, due to fixed manufacturing costs