Question

RefreshAde produced 11,000 cases of powdered drink mix and sold 9,000 cases in April 2018. The sales price was $22, variable costs were $8 per case ($6 manufacturing and $2 selling and administrative), and total fixed costs were $75,000 ($55,000 manufacturing overhead and $20,000 selling and administrative). The company had no beginning Finished Goods Inventory. RefreshAde calculated the cost per unit and the total cost of the 2,000 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.

Answer 1

1.Absorption costing produces highest operating income

Reason is that In absorption costing, Fixed manufacturing overhead costs are distributed

Under absorption costing, 55,000*2000/11000 = $10000 are carried in inventory

And 45000 is Expensed as cost of goods sold

Under variable costing, full amount is charged i.e. $55,000 as expensed as period costs

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