US CMA Part 1 · Chapter 4 · Question 1 of 22
In its first year, a company produced 50,000 units and sold 46,000 units. Fixed manufacturing overhead was $600,000; there were no variances. How will operating income under absorption costing compare with operating income under variable costing?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Absorption costing income will be $48,000 higher
Explanation
Fixed overhead per unit = $600,000 / 50,000 = $12. Inventory increased by 4,000 units, and absorption costing defers $12 of fixed overhead in each of them. Difference = 4,000 x $12 = $48,000; absorption income is higher when production exceeds sales.
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