During its first year of operations, Kima Ltd. experienced the following: If Kima calculates operating profit under the variable costing method as opposed to the absorption costing method, operating profit will be
A) $45,000 lower
B) $270,000 lower
C) $315,000 higher
D) $270,000 higher

Question

Quizplus · Accepted Answer

Under the variable costing method, only variable manufacturing costs are included in the cost of goods sold. Fixed manufacturing overhead costs are treated as period costs and are expensed in the period incurred. Therefore, the difference in operating profit between variable costing and absorption costing is equal to the amount of fixed manufacturing overhead costs that are included in the cost of goods sold under absorption costing, but expensed in the period incurred under variable costing.

In this case, the fixed manufacturing overhead for the year was $270,000. So, if Kima calculates operating profit under the variable costing method as opposed to the absorption costing method, operating profit will be $270,000 lower.

During Its First Year of Operations, Kima Ltd