Franz began business at the start of this year and had the following costs: variable manufacturing cost per unit, $9; fixed manufacturing costs, $60,000; variable selling and administrative costs per unit, $2; and fixed selling and administrative costs, $220,000. The company sells its units for $45 each. Additional data follow. $\begin{array}{lr}
\text { Planned production in units } & 10,000 \
\text { Actual production in units } & 10,000 \
\text { Number of units sold } & 8,500
\end{array}$ There were no variances.
Income reported under absorption costing and variable costing is:
A) always the same.
B) typically different.
C) always higher under absorption costing.
D) always higher under variable costing.
E) always the same or higher under absorption costing.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing costs are spread over all units produced, so some of these costs are included in inventory if not all units are sold. Under variable costing, fixed manufacturing costs are expensed in full in the period incurred. Therefore, income can differ between the two methods when inventory levels change.

Franz Began Business at the Start of This Year and Had