3. The difference in the ending inventory relates to a difference in the han-
dling of fixed manufacturing overhead costs. Under variable costing,
these costs have been expensed in full as period costs. Under absorp-
tion costing, these costs have been added to units of product at the rate
of $10 per unit ($100,000 ÷ 10,000 units produced = $10 per unit).
Thus, under absorption costing a portion of the $100,000 fixed manu-
facturing overhead cost for the month has been added to the inventory
account rather than expensed on the income statement:
Added to the ending inventory
(2,000 units × $10 per unit)... $ 20,000
Expensed as part of cost of goods sold
(8,000 units × $10 per unit)... 80,000
Total fixed manufacturing overhead cost for the month... $100,000
Problem 7-10 (continued)
Since $20,000 of fixed manufacturing overhead cost has been deferred in
inventory under absorption costing, the net operating income reported un-
der that costing method is $20,000 higher than the net operating income
under variable costing, as shown in parts (1) and (2) above.
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Solutions Manual, Chapter 7 365
Problem 7-11 (30 minutes)
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