During its first year of operations, Kima Corp. experienced the following: Units manufactured 70,000
Units sold 60,000
Product costs:
Variable $10.50/unit
Fixed $315,000
Selling and Administrative:
Variable $1.60/unit
Fixed $140,000
If Kima calculates operating income under the variable costing method as opposed to the absorption costing method, operating income will be:
A)$45,000 lower
B)$270,000 lower
C)$315,000 higher
D)$270,000 higher

Question

Quizplus · Accepted Answer

Under variable costing, only the variable manufacturing costs are included in product costs while fixed manufacturing costs are expensed as period costs. In contrast, under absorption costing, both variable and fixed manufacturing costs are included in product costs. Since Kima Corp. had more units manufactured than sold, the fixed manufacturing costs were absorbed into product costs and carried over to inventory. As a result, under absorption costing, operating income will be higher than under variable costing. The difference is equal to the amount of fixed manufacturing costs that were carried over to inventory (i.e., $315,000 fixed manufacturing costs divided by 70,000 units manufactured = $4.50 per unit carried over to inventory, multiplied by the 10,000 units not sold = $45,000). Therefore, the correct answer is A) $45,000 lower.

During Its First Year of Operations, Kima Corp