Question

Riffraff, launched by entrepreneur Kirsten Blowers Stuckey, sells clothing, jewelry, and gifts.

Required

Kirsten uses variable costing in her business decisions. If Riffraff used absorption costing, would you expect the company’s income to be more than, less than, or about the same as its income measured under variable costing? Explain

Short answer

The income under absorption costing will be greater than the income under vriable costing, if there is increase in inventory in the period. In case of decrease in inventory, income will lower.

Step-by-step solution

Step 1:Introduction to costing

Costing is considered as managerial accounting that emphasis on computation of the total cost of the product produced in the organization. The company can utilize any method, like variable costing, or marginal costing, or absorption costing, to compute the total cost of the product.

Determination of costing method

Under absorption costing, a manager can increase income simply by producing more and ignoring regardless whether the excess units can be sold.

Reported income under variable costing is not impacted by production level changes since all fixed production costs are considered as expense in the year of occurrence. Under variable costing, organizations increase income by selling more units, not by producing more inventory.