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16 December, 17:05

A manufacturer reports the information below for three recent years. Year 1 Year 2 Year 3 Variable costing income $ 120,500 $ 125,600 $ 127,700 Beginning finished goods inventory (units) 0 1,550 1,050 Ending finished goods inventory (units) 1,550 1,050 1,150 Fixed manufacturing overhead per unit $ 3.80 $ 3.80 $ 3.80 Compute income for each of the three years using absorption costing.

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  1. 16 December, 17:23
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    Absorption income 114, 610 127,500 127,320

    Explanation:

    Year 1 Year 2 Year 3

    Beginning finished

    Goods inventory (units) 0 1,550 1,050

    Ending finished

    Goods inventory (units) 1,550 1,050 1,150

    Change in Inventory 1550 500 100

    Fixed manufacturing

    Overhead per unit $ 3.80 $ 3.80 $ 3.80

    Absorption Income Less

    Variable Income $ 5890 ($ 1900) $ 380

    Variable costing income $ 120,500 $ 125,600 $ 127,700

    Difference $ 5890 ($ 1900) $ 380

    Absorption income 114, 610 127,500 127,320

    When inventory increases or decreases income differs under absorption and variable costing and is calculated by the following formula

    Difference in fixed expense overhead expensed under absorption and variable costing = Change in inventory units * Predetermined overhead rate

    When the inventory units increase the fixed manufacturing overhead cost is released from inventory and deducted from variable income.

    Similarly when the inventory units decrease the the fixed manufacturing overhead cost is deferred from inventory and added to variable income.
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