Question

Apple’s ending inventory amounts (in \( millions) are shown below:

2015 2014 2013

Ending inventory. . . . . . . . . . . . . . . . . . . . . . . . . . \)2,349 \(2,111 \)1,764

Required

1. Assume Apple uses variable costing for some of its internal reports. For each of the years 2015 and 2014, would net income based on variable costing be higher, lower, or no different from net income based on absorption costing? Explain.

2. Assume Apple is considering implementing a just-in-time (JIT) inventory system. Would a JIT system increase, decrease, or have no effect on differences in net income between absorption costing and variable costing? Explain.

Short answer

1. The income under absorption costing method is higher than the income under variable costing method.
2. It will reduce expenses such as direct material and storage cost of the company and thus it will affect the net income and increases the net income of the company.

Step-by-step solution

Step 1:Analysis of income under costing method

If the company under goes absorption costing then its income will be different from the income measured under variable costing because in variable costing the fixed production overhead cost is not a part of the production price but it is involved under revenue declaration of the applicable period. Thus, no considering of fixed cost is engrossed by the closing inventory.

To determine whether income under absorption costingwillbe more or less or same as that of income in variable costing, the following is to be followed-

1. The net income under absorption costing schemes is in variable costing method when inventory increases.
2. The net income under variable costing schemes is in absorption costing method when the inventory is reduced.

Explanation on JIT system

The just-in-time (JIT) inventory system increases efficiency and minimizes inventory. JIT production systems reduces inventory costs because producers do not have to pay storage costs as they receive materials and parts as needed for production.