Question

A manufacturer reports the information below for three recent years. Compute income for each of the three years using absorption costing.

	Year 1	Year 2	Year 3
Variable costing income	\(110,000	\)114,400	\(118,950
Beginning finished goods inventory (units)	0	1,200	700
Ending finished goods inventory (units)	1,200	700	800
Fixed manufacturing overhead per unit	\)2.50	\(2.50	\)2.50

Short answer

The net income under absorption costing in

Year 1 is$113,000.

Year 2 is$113,150.

Year 3 is$119,200.

Step-by-step solution

Meaning of Absorption Costing

Absorption costing is one of the methods used in the cost accounting branch to determine the price of a product produced. It considers bothdirect and indirect expenses associated with the production of a product.

Computation of income  

Particulars	Year 1	Year 2	Year 3
Variable costing income	$110,000	$114,400	$118,950
Add: Fixed overhead in ending inventory: Year 1: 1200*2.50 Year 2: 700*2.50 Year 3: 800*2.50	3,000	1,750	2,000
Less: Fixed overhead in beginning inventory		(3,000)	(1,750)
Absorption costing income	$113,000	$113,150	$119,200