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This posting addresses absorption and variable costing.

Selected information concerning the operation of Kern company for the year ended December 31, 2011, is available as follows:
Units produced 10,000
Units sold 9,000

Direct materials used 40,000
Direct labor incurred 20,000
Fixed factory overhead 25,000
variable factory overhead 12,000
Fixed selling and administrative expense 30,000
Variable selling and administrative expense 4,500
Finished goods inventory, January 1, 2011. None

No work-in-process inventories existed at the beginning or end of 2011.

1.) What would be Kern's finished goods inventory cost under the variable(direct) costing method at December 31, 2011?

2.) which costing method-absorption or variable costing- would show a higher operating income for 2011, and by what amount?

Solution Preview

1.) 40000 + 20000 + 12000 = 72000

72000 / 10000 = 7.2

10000 - 9000 = 1000

7.20 * 1000 = 7,200

Answer: $7,200

2.) Because inventory ...

Solution Summary

The solution calculates finished goods inventory cost under the variable(direct) costing method and determines which costing method-absorption or variable costing- would show a higher operating income.

$2.19