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28 April, 20:23

Manta Ray Company manufactures diving masks with a variable cost of $31. The masks sell for $40. Budgeted fixed manufacturing overhead for the most recent year was $712,800. Actual production was equal to planned production. Required: State whether operating income is higher under variable or absorption costing and the amount of the difference in reported operating income under the two methods. Treat each condition as an independent case. (Do not round intermediate calculations.)

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  1. 28 April, 23:52
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    When there is no change in the beginning and ending units of inventory i. e the units sold are equal to the units produced, the income under variable and absorption costing remains the same which is the condition in the given question.

    Explanation:

    If we have 80,000 units produced and sold then the income under both methods will be the same.

    Manta Ray Company

    Income Statement Variable Costing

    Sales $40*80,000 = $ 3200,000

    Variable Costs $ 31*80,000 = $ 2480,000

    Contribution Margin $ 720,000

    Less Fixed Costs $ $712,800

    Gross Profit $ 7200

    Manta Ray Company

    Income Statement Absorption Costing

    Sales $40*80,000 = $ 3200,000

    Variable Costs $ 31*80,000 = $ 2480,000

    Fixed Costs $ $712,800

    Gross Profit $ 7200

    When there is no change in the beginning and ending units of inventory i. e the units sold are equal to the units produced, the income under variable and absorption costing remains the same which is the condition in the given question.

    If there is an increase in the inventory units (ie. production is less than the Sales) the fixed manufacturing overhead cost is released from inventory and deducted from variable income.

    Similarly when the inventory units decrease (ie. production is more than the Sales) the fixed manufacturing overhead cost is deferred from inventory and added to variable income.
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