Burrito-Blast makes bean and cheese burritos that it sells to grocery stores. The burritos sell for $1 each. Burrito-Blast had beginning inventory of $20,000 on June 1 for 80,000 burritos. During June the company produced 500,000 burritos. June production costs are as follows: -The company's June 30 ending inventory consists of 20,000 burritos. 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 and fixed manufacturing costs in the cost of inventory. Therefore, when inventory levels are high, as in this case with 20,000 burritos, absorption costing results in a higher value of ending inventory compared to variable costing. This higher inventory value under absorption costing leads to a larger operating income because more costs are capitalized in inventory and less are expensed on the income statement during the period.

Burrito-Blast Makes Bean and Cheese Burritos That It Sells to Grocery