Question 1
The difference in the operating income could be explained by the fixed cost element contained in cost of goods sold under absorption costing. The operating incomes of both methods can be reconciled by factoring in the fixed cost per unit of inventory multiplied by the changes in inventory.
Year 1
Operating income under absorption costing 27,500
Less fixed cost carried forward in closing stock (14*500) (7,000)
Operating income under variable costing 20,500
Year 2
Operating income under absorption costing 13,500
Add fixed cost carried down in opening stock (14*500) 7,000
Operating income under variable costing 20,500
Question 2
The total income under absorption costing is $27,500 in year 1 and $ 13,500 in year 2. On the other hand, the total income under variable costing is $20,500 in both year 1 and year 2
Question 3
The total sales revenue under absorption costing is $125,000 for both year 1 and year 2. The total sales revenue under variable costing is also $125,000 for both year 1 and year 2.
Question 4
The total cost expensed in under absorption costing is $97,500 in year 1 and $111,500 in year 2. On the other hand, the total cost expensed in under absorption costing is $ 104,500 in both years.
Question 5
Absorption costing
Year 1 Year2
Sales 125,000 125,000
Cost expensed 97,500 111,500
Operating income 27,500 13,500
Variable costing
Year 1 Year2
Sales 125,000 125,000
Cost expensed 104,500 104,500
Operating income 20,500 20,500
Question 6
Absorption costing transfers some of this year’s fixed costs into the next period. This explains why in the year 1 lower cost was expensed and the operating income was higher compared to year 2 in spite of the fact that the sales revenue was the same in both years. However, under variable costing the cost expensed was the same for both years.
