"Bellue Inc. manufactures a single product. Variable costing net operating income was $93,400 last year and its inventory decreased by 2,300 units. Fixed manufacturing overhead cost was $1 per unit for both units in beginning and in ending inventory. What was the absorption costing net operating income last year?"

The answer is $91,000

Explanation:

Solution

Given that:

Net Operating Income as per Variable Costing =  $93,400

Less: Fixed manufacturing overhead released from Inventory (2300*$1)= $2300

Net Operating Income as per Absorption costing = $91,000

Hence Net operating income in absorption costing is $ 91,000

The difference in Net operating Income which is under the  variable costing technique & Absorption costing method is due to treatment of Fixed manufacturing overhead.

Difference can be reconcile using following below:

Criteria                                                               Operating Income higher in

Ending Inventory is higher than beginning InventoryAbsorption costing

Ending Inventory is lesser than beginning InventoryVariable costing

So,

The inventory reduced by 2,300 units; implies that Ending inventory is lesser than Beginning Inventory, the Net operating income higher in Variable costing.                                          

d. the economy will face inflation.

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