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Willis Company had an operating profit of $75,000 using variable costing and an operating profit...

Question:

Willis Company had an operating profit of $75,000 using variable costing and an operating profit of $57,000 using absorption costing. Variable production costs were $15 per unit. Total fixed manufacturing overhead was $120,000 and 10,000 units were produced.

During the year, the inventory level:

a. increased by 1,200 units.

b. increased by 1,500 units.

c. decreased by 1,500 units.

d. decreased by 1,200 units.

Variable vs. Absorption Costing:

Variable and absorption costing are two methods used to assign costs to inventory. Variable costing only includes variable cost sources such as direct materials, direct labor, and variable manufacturing overhead. Absorption costing, in contrast, includes fixed cost sources such as fixed manufacturing overhead.

Answer and Explanation:

Net operating income, variable costing $75,000
Net operating income, absorption costing ($57,000)
Difference in net operating income $18,000
Fixed cost per unit ($120,000 / 10,000 units) / $12
Decrease in Inventory Level 1,500

We see that inventory levels decreased by 1,500 units. We know that it was a decrease because the operating profit under absorption costing was less than operating profit under variable costing. Thus, the correct answer is c. decreased by 1,500 units.


Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

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Chapter 13 / Lesson 5
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