Which costing method (variable or absorption) will generate a higher net operating income in Cutterski's first year of operations and by how much?
A)variable by $81,000
B)variable by $108,000
C)absorption by $81,000
D)absorption by $108,000

Question

Quizplus · Accepted Answer

In Cutterski's first year of operations, absorption costing would generate a higher net operating income by $81,000 compared to variable costing. This is because absorption costing includes all manufacturing costs, including fixed overhead costs, in the cost of the product. These fixed costs are then spread over the units produced, resulting in a higher inventory valuation and a higher net operating income. On the other hand, variable costing only includes variable manufacturing costs in the cost of the product, and fixed overhead costs are treated as period expenses. Therefore, under variable costing, the inventory valuation is lower and the net operating income is also lower compared to absorption costing.

Which Costing Method (Variable or Absorption) Will Generate a Higher