Roberta's Hot Stuff began making hot and sour soup in August, 2012. The soup sells for $2 for a large package. Variable production costs are $0.70 per package. Roberta's Hot Stuff incurs monthly fixed manufacturing overhead costs of $40,000 and fixed selling and administrative cost of $8,000. On August 31, 2012 ending inventory was 10,000 soup packages. Assume Roberta's Hot Stuff produced 400,000 soup packages in September. -Roberta's Hot Stuff sold 406,000 of the soup packages in September. Which method would result in the larger operating income and why? A) Variable costing- because the cost per unit is less, which means ending inventory costs are smaller B) Variable costing- because the fixed manufacturing costs are all expensed during September C) Absorption costing- because the cost per unit is more, which means ending inventory costs are larger D) Absorption costing- because the fixed manufacturing costs are all expensed during September

Question

Quizplus · Accepted Answer

Absorption costing includes both variable costs and fixed manufacturing overhead in the cost of inventory, leading to higher per-unit costs and, consequently, higher ending inventory values when compared to variable costing. This method defers a portion of the fixed manufacturing overhead costs to future periods if there is unsold inventory, potentially resulting in a larger operating income for the period, especially when production exceeds sales, as in this scenario.

Roberta's Hot Stuff Began Making Hot and Sour Soup in August