Need help with this problem. Please show me how to work this one:
The level of inventory of a manufactured product has increased by 8,000 units during a period. The following data are also available
Unit manufacturing costs of the period: Variable: $24 Fixed: $10
Unit operating expenses of the period: Variable: 8 Fixed:3
What souled be the effect on income from operations if variable costing is used rather than absorption costing?
A. $80,000 decrease
B. $80,000 increase
C. $88,000 increase
D. $104,000 increase
Well, it sounds like you're dealing with a cost accounting question. Let me put on my accounting hat and try to explain it to you with a little humor.
So, in this scenario, we have an increase of 8,000 units in inventory. Now, let's break down the costs involved.
With variable costing, we consider only the costs directly related to the production of the units. It's like picking out only the essential ingredients for your favorite recipe. In this case, we have variable unit manufacturing costs of $24 and variable unit operating expenses of $8. So, the total variable cost for each unit is $24 + $8 = $32.
Now, with absorption costing, we include both variable costs and fixed costs. It's like buying a whole package deal that includes not just the ingredients, but also all the extras. So, we add the fixed unit manufacturing costs of $10 and the fixed unit operating expenses of $3 to the variable costs. That gives us a total unit cost of $24 + $10 + $8 + $3 = $45.
Now, we have to find the effect on income from operations when using variable costing instead of absorption costing. Well, here's the punchline: since variable costing considers only the essential costs, it will give us a higher income from operations compared to absorption costing.
So, to calculate the effect, we need to multiply the increase in inventory units (8,000) by the difference in unit costs under variable and absorption costing. That is, $45 - $32 = $13.
Now, the moment we've all been waiting for! Drumroll, please... *drumroll* The effect on income from operations is 8,000 units × $13 = $104,000.
So, the answer is option D: $104,000 increase. Ta-da! But hey, let's not take it too seriously. Remember, in the world of accounting, numbers can be a bit like clowns – always juggling around and making things interesting!
To determine the effect on income from operations between variable costing and absorption costing, we first need to understand the difference between the two costing methods.
Variable costing only includes the variable manufacturing costs and variable operating expenses in the cost of a manufactured product. Fixed manufacturing costs and fixed operating expenses are treated as period costs and are not included in the cost of the product.
Absorption costing, on the other hand, includes all manufacturing costs (both variable and fixed) in the cost of a manufactured product. This means that fixed manufacturing costs are absorbed and allocated to the units produced.
In this problem, the level of inventory has increased by 8,000 units during the period. To determine the effect on income from operations, we will compare the difference in cost of goods sold (COGS) between the two methods. Since fixed manufacturing costs are absorbed into the cost of the product under absorption costing, the COGS will be higher compared to variable costing.
Here's how you can calculate the effect on income from operations using each costing method:
1. Variable costing:
COGS = Variable manufacturing costs + Variable operating expenses
COGS = (Variable manufacturing cost per unit + Variable operating expense per unit) * Units produced
COGS = ($24 + $8) * 8,000 units
COGS = $32 * 8,000 units
COGS = $256,000
2. Absorption costing:
COGS = Variable manufacturing costs + Fixed manufacturing costs + Variable operating expenses
COGS = (Variable manufacturing cost per unit + Fixed manufacturing cost per unit + Variable operating expense per unit) * Units produced
COGS = ($24 + $10 + $8) * 8,000 units
COGS = $42 * 8,000 units
COGS = $336,000
Therefore, the effect on income from operations (difference in COGS) using variable costing instead of absorption costing would be:
$336,000 - $256,000 = $80,000 decrease
Thus, the correct answer is A. $80,000 decrease.