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Intel Corporation: variable costing or absorption costing?

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Intel Corporation is the world's largest manufacturer of computer processor chips. The Company's manufacturing processes are highly automated, so most manufacturing costs are fixed. You can access the company's most recent annual report in the Investor Relations section of its web site www.intel.com. Its most recent operating income figure is on its income statement, and the values of beginning and ending inventories are on its balance sheet. Assume that Intel uses absorption costing in its annual report and that 60% of its beginning and ending inventory values consist of fixed manufacturing overhead costs. Estimate the company's operating income if it had used variable costing instead of absorption costing as required by GAAP.

Which method - variable or absorption costing - will result in higher assets on the balance sheet? Why? Provide an illustration to your response.

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Solution Summary

I have estimated ending finished goods inventory from the footnote on Page 57 of the 2009 Annual Report of Intel under both absorption and variable costing and then explained why absorption costing will always give a larger inventory amount.

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I have estimated ending finished goods inventory from the footnote on Page 57 ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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