[Student24]

The following table shows the inventory balances, in units, for years 1, 2, and 3. Total fixed manufacturing costs were $27,260 for each of the last five years. The units in Year 1 beginning inventory were based on production of 470 units.

Year 1 Year 2 Year 3
Beginning inventory
60 0 130
Production
470 580 580
Sales
(530 ) (450 ) (580 )
Ending inventory
0 130 130

For each year, calculate the difference between absorption costing and variable costing operating income. Indicate which costing system has the higher net income.

I have to find the difference in operating income for Year 1 using variable costing. And I have to find it for Year 2 using absorption costing.

[gulledge46]

Simple way, do income statement under each method for all three years. Then compare answers. Basically however, the difference in income is equal to the change in inventory level times the fixed cost per unit under variable costing. Do the statements of income.